Robert D Hershey Jr
If actions speak louder than words, the person many consider the United States’s most astute stock-market investor seems to be whispering “sell”.
While Warren E Buffett, the decabillionaire “Oracle of Omaha”, has always argued that market drops provide chances to scoop up bargains, his proposed acquisition of General Re, the US’s biggest re-insurance company, involves a major portfolio shift from stocks to bonds.
Before the deal was announced, Buffett’s Berkshire Hathaway holding company had $40-billion of its $50- billion in assets allocated to the stock market. The addition of General Re, laden with bonds, changes that share to $45-billion out of $74- billion.
“In one fell swoop, Berkshire reduces its stock holdings as a percentage of investment assets from 80% to roughly 61%,” said Daniel S Pecaut, proprietor of a brokerage firm in Sioux City, Iowa, and a close student of his corn belt neighbour. “Clearly he is selling stocks, and there is something important going on.”
Buffett denied when the deal was announced in June that it reflected a belief that stocks might be peaking. “It is not a market call whatsoever,” he stated. But it is difficult to conclude that the purchase is anything but a re-allocation of Berkshire’s assets.
There have been other clues that Buffett has grown wary of stocks. Berkshire has lately been venturing outside its traditional realm of blue- chip companies. In recent years, Berkshire took a large position in oil futures, and the company stunned the metals market last year by buying 111-million ounces of silver.
Another sign of change is that Berkshire shed 5% of its stock portfolio last year, in what Buffett in his annual letter to shareholders called part of an effort “aimed at changing our bond-stock ratio moderately”.
Rarely, if ever, according to Buffett watchers, has he referred to the attractiveness of bonds and stocks. “Though we don’t attempt to predict the movements of the stock market,” Buffett allowed in his letter, “we do try, in a very rough way, to value it.”
Even last year, good value was hard to find, in Buffett’s view. “We are not pleased with our prospects for committing incoming funds,” Buffett cautioned. “Prices are high for both businesses and stocks.”
For General Re’s shares, however, Buffett offered a big 28,5% premium. And he agreed to pay with Berkshire stock, even though less than four months earlier he had put a sharp pencil to all his previous stock-only acquisitions over the years and found that they had actually lost money.
Berkshire has a long and highly profitable experience in the insurance business. The deal for General Re – Buffett’s biggest by far – will create a float of $22-billion. (Float refers to the free use of money collected as premiums but not yet paid to settle expected claims.)
Buffett has stressed the transaction’s attributes as a corporate marriage, but others are also impressed with its ingenuity in diluting the stock portion of his company’s portfolio.
That avoids a horrendous tax bite from an outright sale of immensely appreciated stock, and the likely market havoc from “Buffett turns bearish!” headlines about such a sale.
Indeed, little mention has been made of Buffett as a possible contributor to the recent market swoon.
Pecaut concluded this about the deal: “Berkshire is trading away 18% of its holdings in Coca-Cola, American Express, Gillette, etcetera, but doing so in a way that it pays no taxes. As my kids would put it, `way cool’.”