Warren Watch: Studying Berkshire and the market - Omaha.com
Published Sunday, October 2, 2011 at 1:00 am / Updated at 10:10 pm
Warren Watch: Studying Berkshire and the market
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Join Steve Jordon on Tuesdays at 11:30 a.m. for a live chat about all things Warren Buffett.

Step into the classroom and check out this chart.

Lesson 1: The Berkshire Hathaway line is higher than the two others for most of the past five years.

That means Berkshire, the Omaha investment company headed by Chairman and CEO Warren Buffett, has had a higher stock price most of that time, relative to the two most common stock market indicators, the Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index.

Lesson 2: Toward the right-hand side of the chart, Berkshire's line dips down toward the two others. That means its advantage over the overall stock market has almost completely disappeared. If we made the same comparison for just the past year, you'd see Berkshire's line running significantly below the two others. That's called underperforming.

Lesson 3: All three lines tend to follow parallel tracks, in general. All three dip in September 2008 when Lehman Brothers, the big financial company, filed for bankruptcy. They slide downward to March 2009 as the seriousness of the credit crisis created a near-panic among investors. All three head back up in 2010, only to turn back in 2011.

All three end the five-year period close to where they started.

Lesson 3 has caught the attention of financial academic types, including George Morgan, who followed Berkshire for years as a stockbroker and now teaches at the University of Nebraska at Omaha.

As Berkshire grows bigger, Morgan said, it has more of a tendency to follow the overall direction of the stock market. That's partly because it's part of the S&P index and mutual funds based on that index buy or sell all those stocks, Berkshire included, as their investors demand by either putting money into the funds or taking it out.

During the market crash in 2008-09, investors pulled money out of mutual funds, which sold stocks generally without discriminating between "good" or "bad" companies. Investors wanted their money, and the money managers had to sell stocks to give it to them, pushing prices down for nearly all companies.

Morgan said studies indicate that about 85 percent of the price movements in stocks result from the overall direction of the stock market, with 15 percent caused by factors affecting only individual companies.

Contributing to that situation are mutual funds based on stock indexes, which hold $3 trillion of the $15 trillion in the market. The funds buy or sell shares of all the stocks they own, causing the same upward or downward pressure on them as a group and affecting the overall direction of the market.


He likens it to a house: With the windows open, the temperature inside is the same as outside. With the windows closed and the air conditioner or furnace on, the house can cool or heat itself separately from the outside weather.

You could see a measure of security in all this, if you hope to ride the general wave of American business profits as a whole in the long run. But it also could mean that it's more difficult to get ahead by choosing investments with high returns.

Buffett regularly recommends investments in index mutual funds for people who are not willing or able to study investments and make more informed choices.

Last week's decision by Berkshire Hathaway to repurchase its own shares, if they are within a certain price range, is an indication that Buffett believes the company's stock price should not have mirrored the general market in recent months. The announcement bumped up Berkshire's price on Monday, but then it moved parallel to the Dow and S&P averages the rest of the week.

Morgan said there's no doubt that the bigger Berkshire gets, the more it acts like the overall market. So the question is, where will Berkshire's price go from here?

Oops — there's the bell. Class dismissed.

Long belief in buybacks

Berkshire's plan to repurchase its shares, if the price is right, falls in line with comments Buffett has been making for more than 25 years.

The key, he has said in past letters to shareholders, is that repurchases should benefit those who hold onto their shares, and shareholders should be well-informed so they can buy shares if they want.

From his 1984 letter:

"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases."

From his 1999 letter:

"Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around. ...

"You should be aware that, at certain times in the past, I have erred in not making repurchases. My appraisal of Berkshire's value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities."

Brandon's comeback?

Joseph Brandon, former head of Berkshire's General Reinsurance division, may be a potential buyer of Transatlantic, the Wall Street Journal reported, which would be a comeback after his 2005 resignation in the face of an investigation into General Re's dealings with American International Group.

Brandon was investigated but never charged, but Buffett was pressured into replacing him by the regulators looking into illegal transactions between the two companies, the Journal said.

Citing unnamed people familiar with the Transatlantic deal, the Journal said Brandon has yet to put together a group to join him in a takeover offer. Berkshire also has made an offer to buy Transatlantic, although it has not been accepted and, the Journal said, it appears Berkshire is out of the running.

At Fortune summit

Buffett is one of the speakers at Fortune magazine's "most powerful women" summit Tuesday and Wednesday at the Ritz-Carlton hotel in Laguna Niguel, Calif.

Others include actress Glenn Close, media executive Arianna Huffington, DuPont CEO Ellen Kullman, PepsiCo CEO Indra Nooyi, Goldman Sachs CEO Lloyd Blankfein, Facebook executive Sheryl Sandberg, author and comedian Chelsea Handler and activist Gloria Steinem.

Buffett also spoke at the past two annual Fortune summits.

Buffett likes Tesco

The topic is quiet here, but in Britain the financial press is hot on the story of Berkshire continuing to buy shares in Tesco, the English company that is the second-most-profitable retailer in the world behind Walmart.

Berkshire recently bought $180 million worth of Tesco stock, raising its stake from 3.21 percent to 3.64 percent of the total. The investment was viewed as a vote of confidence in Phil Clarke, who became CEO in March and is making changes.

Contact the writer:

402-444-1080, steve.jordon@owh.com

twitter.com/buffettOWH

Contact the writer: Steve Jordon

steve.jordon@owh.com    |   402-444-1080    |  

Steve covers banking, insurance, the economy and other topics, including Berkshire Hathaway, Mutual of Omaha and other businesses.

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