Time for Buffett to answer some tough questions

Time for Buffett to answer some tough questions
Berkshire Hathaway shareholders are heading for the "Woodstock for capitalists" – the company's annual gathering in Omaha. Warren Buffett, the Berkshire boss, has changed the format to encourage more questions about the business. Investors should take him up on that.

By Richard Beales
Published: 6:20PM BST 01 May 2009

The legendary investor is 78 and his long-time sidekick, Charlie Munger, is 85. With his track record and public profile, Buffett is the epitome of the corporate "key man", as Fitch Ratings pointed out in knocking Berkshire's triple-A rating down a notch in March. He has, he says, chosen his successors. While their identities are undisclosed, it's a safe bet they know what they are doing. But the culture that brings 30,000-odd shareholders to Omaha every year will unavoidably change.

Another important Buffett decision of late has been to expose Berkshire to big derivatives bets – $67bn of potential exposure at the end of 2008. This is in spite of once calling such instruments "financial weapons of mass destruction".

Buffett recognises the apparent double standard, and brings to derivatives much of the common sense he applies to other investments. The contracts he has written, so far, are relatively straightforward and he has limited expected losses to an amount Berkshire could easily handle.

Berkshire shares have lost a third of their value in the past year. It is suddenly looking like what it is – a largely unhedged equity investment vehicle with a focus on the financial sector.

Its giant insurance businesses don't look so special at the moment. Large stakes in American Express, Wells Fargo and rating agency Moody's underline the finance focus. Along with the succession question, that may help to explain why Berkshire's shares appear to be trading at a discount to the market value of its holdings.

But another development should generate optimism among the Berkshire faithful: opportunities to invest on the cheap ought now to be plentiful. Buffett picked up some good deals last year, Berkshire still has strong credit and plenty of cash – and the Sage is still around.

After years in which few bargains were available and Berkshire's size made meaningful deals hard to come by, he has the chance to redeem himself.




http://www.telegraph.co.uk/finance/breakingviewscom/5258851/Time-for-Buffett-to-answer-some-tough-questions.html