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Buffett copycats risk a pounding as Berkshire portfolio suffers

Thursday, October 23, 2014 - 13:19
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Mr Warren Buffett's ability to sit tight and ride out short-term market gyrations has been one of the keys to his success as a long-term investor.

[NEW YORK] It's not been a good time for Warren Buffett wannabes.

Sharp drops in many of the stocks owned by Buffett's Berkshire Hathaway in recent weeks hit the sprawling conglomerate's equity portfolio hard. The loss on seven of those holdings alone totals more than US$5 billion provided Berkshire's stakes have remained the same since June 30, the last date for which they were disclosed

In particular, Berkshire's been stung by large holdings in IBM and long-time Mr Buffett favorite Coca-Cola, both of which tumbled after disappointing third-quarter results. His penchant for energy stocks hasn't helped either, given the damage done to the prices of energy assets by the slumping global oil price.

For the world's third richest man, unrealized losses of a few billion dollars aren't necessarily anything to cry about.

Mr Buffett's ability to sit tight and ride out short-term market gyrations has been one of the keys to his success as a long-term investor. And unlike, say, mutual fund managers, he doesn't have to worry about redemptions forcing him to sell stock.

But for others - fund managers, smaller institutions, even retail investors - who often try to follow in Mr Buffett's footsteps, the losses could be harder to get over.

Berkshire Hathaway did not respond to requests for comment.

With 400 million shares of Coke on June 30, Berkshire is the company's largest shareholder - and Mr Buffett is perhaps the world's most famous Cherry Coke fan. "I love Coke, I love the management," he said in a television interview in April, as the company faced a controversy over an executive compensation plan.

Coke shares plunged 6 per cent on Oct 21 after it said that quarterly profit slumped. The shares are down 4.1 per cent since June 30 for a possible paper loss to Berkshire of US$696 million.

Similarly, IBM - of which Berkshire held about 70 million shares on June 30 - is down about 11 per cent since the end of the second quarter, with much of that decline occurring after it ditched its 2015 operating earnings target this week. Since June 30, IBM's slump may has cost Mr Berkshire nearly US$1.3 billion on paper.

Short-seller Doug Kass has repeatedly pointed to both of those companies as weak spots in Berkshire's portfolio.

Mr Kass, who runs Seabreeze Partners Management in Palm Beach, Florida, was named Buffett's "credentialed bear" for the 2013 Berkshire Hathaway shareholders' meeting. To spice up proceedings at the gathering, which is attended by thousands of Berkshire shareholders, Mr Buffett got Mr Kass to present the bear case against the conglomerate, which owns dozens of businesses selling everything from ice cream to insurance.

"Very few people have the sort of pain threshold and long-term time frame and risk appetite that Warren Buffett has," Mr Kass said. "His risk profile is different than a mere mortal."

Among the other stocks that were in Berkshire's portfolio at June 30 that have dropped significantly are banking group Wells Fargo, credit card group American Express, energy giant Exxon Mobil, Canadian oil producer Suncor Energy and automaker General Motors.

Exxon often sees its fate tied to the price of oil. With crude down about 18 per cent so far this year, Mr Buffett's 41 million shares of Exxon at June 30 would be worth almost US$311 million less now.

Earlier this month, Berkshire Hathaway said that it had sold off some of its stake in troubled British grocer Tesco, taking it to below 3 per cent from around 3.96 per cent of Tesco's shares in May.

Those shares are off 45 per cent this year in the wake of its worsening performance, exacerbated by an accounting scandal. Mr Buffett himself called that investment a "huge mistake." Because Berkshire Hathaway owns stock in dozens of companies, several of its holdings are performing better. Retail behemoth Wal-Mart, for example, is up 1.3 per cent since the end of the second quarter. And consumer products maker Procter & Gamble is up 7.2 per cent from June 30 to Oct 22.

For all its substantial portfolio holdings, the cornerstone of Berkshire Hathaway's earnings comes from the dozens of businesses it controls, including insurance company Geico and railroad BNSF. Those companies and others helped bring Berkshire's profit last year to a record US$19.48 billion.

Nor have investors punished Berkshire Hathaway's own stock for the recent market gyrations. The class A shares of the conglomerate are up 16 per cent this year, and up 8.75 per cent since the second quarter.

That handily beats the S&P 500's tepid 4.3 per cent gain so far this year.

Last year, for the first time since Mr Buffett took control of Berkshire in 1965, the company's five-year gain in book value per share underperformed the S&P 500's five-year rise, including dividends but before tax.

But Mr Buffett has often said that Berkshire Hathaway will do best against the index in lackluster or even down markets. In recent years, stocks have been surging.

And Mr Buffett's preferred holding time of forever is well known, with the so-called Oracle of Omaha an advocate of buy-and-hold strategies for everyone from himself through Mom-and-Pop retail investors.

Indeed, Mr Buffett himself has often praised falling markets as buying opportunities. "Tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values,"he wrote in his annual letter to shareholders this year. "A climate of fear is your friend when investing; a euphoric world is your enemy."

REUTERS

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