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Old 12-21-2005, 06:48 PM
Uglyowl Uglyowl is offline
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Default Articles popping up about Buffett\'s time has passed;Reminds me of 1999

I saw this today in Forbes today and reminds me of all the articles in 1999 saying Buffett time has passed as he wasn't "with the times" with technology. We all know what happened to those guys.

Commentary
Warren Buffett Entrapped By Success
Martin T. Sosnoff, 12.21.05, 12:50 PM ET

NEW YORK - Warren Buffett's reign as the iron man of the investment world may be peaking. Like a great Bordeaux vintage, say the '45, even the '59 or '61, he's likely to plateau and then follow a gentle downward arc over the next decade."

I wrote that in a column for Forbes published May 20, 1996. Berkshire Hathaway (nyse: BRKA - news - people ) shares were around $38,000. Now shares are at $90,000. The annual compound rate of gain is over 9%--respectable, but no barn burner. The S&P 500 Index, which Buffett compares himself with, also compounded at 9.2%.

I'm not convinced this is the relevant index for Buffett going forward. Too much of Berkshire's capital is outside the market currently, with currency plays, $40 billion in cash and plenty of capital in bonds from the insurance properties' float.

I've always admired Buffett's work habits. He operates out of the heartland with a couple of pencils and yellow legal-sized pads. He reads source materials: annual reports, 10Ks and 10Qs. He keeps analysts at a distance while searching for outstanding corporate managers who can do all the work and make him rich. Google (nasdaq: GOOG - news - people ) comes to my mind as a great pick, but Buffett dismisses technology as indecipherable. Coca-Cola (nyse: KO - news - people ) and Gillette (nyse: G - news - people ), great franchises worldwide, are more his style, along with Anheuser-Busch (nyse: BUD - news - people ) and Wal-Mart Stores (nyse: WMT - news - people ).

Berkshire's equity portfolio is an encapsulated monument to Buffett's scope as a great value investor with the acute vision of a Ted Williams. He hits .400 consistently, while few of us barely manage .300. Sometimes, we hear the thump in the catcher's mitt as we go down swinging. The year 2000 comes to mind.

But neither Buffet's biographers nor security analysts have suggested that the premium for running Berkshire is outdated. Unless he soon discovers a couple of new Coca-Colas (a nonperformer as of late), the premium over book value traces its downward path. It was two times book value, now less, and like Venice, could gently sink into the mud. Most personal-holding companies, what Berkshire approaches, sell at discounts to book value. One-man shows rarely go down smoothly with the Street. Berkshire is the shining exception.

But Buffett has sat with some $40 billion in cash for more than a year. An index fund outperformed cash in 2005, up by 5%. Of the $45 billion in equity holdings, there is an unrealized gain of some $30 billion. Much of the portfolio is unmovable unless Buffett wants to single-handedly reduce the federal deficit by over $11 billion.

Also troubling is that Berkshire's reinsurance properties sustained $3 billion in underwriting losses from Katrina. Berkshire unit General Re has its hands full answering subpoenas from the Securities and Exchange Commission and New York State's attorney general in respect to insuring counter parties like American International Group (nyse: AIG - news - people ), where the intent was not to insure risk but help the other guy offset losses and smooth out earnings reports. Ron Ferguson, Gen Re's former headman, took the Fifth before the SEC and Department of Justice, and subsequently was severed from the job he had held for decades. John Houldsworth, former head of Cologne Reinsurance, a subsidiary of Gen Re, has pleaded guilty to conspiring to misstate certain AIG financial statements.

Buffett does have his moments, however. Take the Salomon Brothers contretemps, for example. Buffett stepped in to run Salomon--now a unit of Citigroup (nyse: C - news - people )--after John Gutfruend and others had allegedly worked to rig a Treasury auction, something we all took seriously. I remember the two-page, single-spaced letter Buffett put out that clearly explained the problem and the remedies. He was great in adversity and saved Salomon's client base and his investment therein.

Berkshire has a huge foreign-currency play on its books, with some $16.5 billion in net notational value. So far this year, the rallying dollar has given Buffet $897 million in pretax losses. He started shorting the dollar in 2002, and to date is still ahead by $2.1 billion. I give him credit for swinging for the fences on a big macro call.

I am intrigued by Berkshire's equity holdings, but not because I can learn anything from them. Buffett discusses furniture and carpentry in his annual report, but not Coca-Cola--an $8 billion holding going nowhere and outshined by PepsiCo (nyse: PEP - news - people ). He could at least discuss Coke's fall from grace as a prime growth stock. Properties like Washington Post (nyse: WPO - news - people ), American Express (nyse: AXP - news - people ) and Gillette (which Berkshire formerly held) are like the Cellophane Man; I don't quarrel with them as polite plays, but they are museum pieces.

Buffett's prowess as a stock picker has to be judged by present and future investments. There were some great Buffett plays this year. For now, let's leave aside the Internet and technology, Google and Yahoo! (nasdaq: YHOO - news - people ). He's allergic to technology, but how could anyone dismiss some 16% of this market's valuation?

Bill Gates sits on Berkshire's board. You wouldn't expect Gates to tell Buffett to buy Google, which has upstaged Microsoft (nasdaq: MSFT - news - people ) unmercifully. Google is the Microsoft of 1986. Where was Berkshire on HMOs, a pure free-cash-flow case that is inside his kitchen? What about low-multiple plays like refiners and drilling rigs that more than doubled, even ExxonMobil (nyse: XOM - news - people ), another free-cash-flow story? Buffett shouldn't have missed Goldman Sachs (nyse: GS - news - people ) and Lehman Brothers Holdings (nyse: LEH - news - people ), businesses he understands like the back of his hand.

We missed commodity plays like U.S. Steel (nyse: X - news - people ), Phelps Dodge (nyse: PD - news - people ) and Inco (nyse: N - news - people ). We're not perfect, but we didn't miss technology and health care--over 30% of the market's valuation. Non-durables, the heart of Berkshire's portfolio, underperformed the market with few exceptions. Anheuser-Busch, a $1.8 billion commitment by Berkshire, has its hands full in a slow-growth U.S. beer market. Energy, technology and health care make up almost half the S&P Index. You ignore them at your own risk.

One new gambit I agree with is the $5 billion commitment to a group of iconic retail properties that are selling at reasonable valuations. They include Wal-Mart, Costco Wholesale (nasdaq: COST - news - people ) and Home Depot (nyse: HD - news - people ). These are singles, maybe doubles, but hardly undiscovered securities. They are executing better but need a zippy economy as a backdrop. In one sense, this play is a non sequitur to his dollar shorting. The dollar will decline if a recession hits, but retailers will stall out.

Let's hope Buffett proves me wrong with brilliant new scores. Maybe he catches the turn in the bond market or makes a big acquisition that works out better than Gen Re. Fund management properties, the closest comparison to Berkshire, rose over 50% the past 12 months. We put a lot of money into Franklin and Alliance funds and sold Berkshire. Kirk Kerkorian smelled value in General Motors (nyse: GM - news - people ), but so far he's half a billion in the hole. You never want to make an investment you can't come back from. In a recession, GM goes down for the full count while Buffett soldiers on, unflappable.

You want Buffett running your money when there's panic in the streets--but that's not what's going on this week and possibly next year.

Martin T. Sosnoff is chairman and founder of Atalanta/Sosnoff Capital, a private investment-management company with approximately $4 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser. He had been a columnist for many years at Forbes magazine and for three years at the New York Post. Sosnoff holds positions either personally or through his firm in Google, Wal-Mart, PepsiCo, American Express, Yahoo!, Microsoft, Home Depot, Goldman Sachs and Lehman Brothers.
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