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Has Warren Buffett lost his touch?
With more than a hundred investments carefully handpicked by the Oracle of Omaha and his disciples -- plus a huge cash hoard of $28 billion -- Buffett's Berkshire Hathaway (BRK.A, news, msgs) was supposed to be a bastion of safety in this turbulent market.
But Buffett, or at least Berkshire, hasn't been immune to the market's volatility. When the market rallied late last week on news of a financial-sector bailout, Berkshire shot up nearly 20%. On Monday, it gave up more than half of that advance.
Before this recent run, it was down 20% since early December, only slightly better than the 22% decline of the S&P 500 Index ($INX) over the same time frame.
Understandably, many Berkshire Hathaway investors feel shaken. They're wondering whether Buffett has finally turned into an investing has-been.
Oh, he's still wealthy enough to rank second in the latest edition of the Forbes 400. But he's down from No. 1, and his $50 billion net worth represents a $12 billion decline in the past six months, Forbes reported.
On Tuesday, Berkshire announced plans to plunk down $5 billion to take a stake in Goldman Sachs Group (GS, news, msgs), at a time when many investors are running scared from the financial sector. In market downturns past, Buffett has made smart buys at the bottom, but it remains to be seen whether this is one of those or will go the way of less fortunate investments in companies such as USAir, now US Airways Group (LCC, news, msgs).
Several theories floating around purportedly make the has-been case. But just one explanation makes sense. We'll get to it in a moment.
First, here are the three bogus theories you need to ignore if you want to play Berkshire Hathaway right -- or if you're one of the many who follow Buffett's every word of advice.
No. 1: No more 'skin in the game'
More than two years ago, Buffett generously decided to give his stake in Berkshire to charitable foundations. This means he won't personally profit from Berkshire's performance.But it's a mistake to think this makes Buffett less motivated, analysts say, because a guy like Buffett hasn't been in it for the money for quite some time. (Read "Buy the stock Buffett's giving away.")
As for the actual stock sales to raise funds for charity, "he said a while ago that there would only be a small portion liquidated annually," says Justin Fuller, an analyst who follows Berkshire Hathaway for Morningstar (MORN, news, msgs). So his selling won't drive down the stocks.
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No. 2: The 'succession issue'
Another explanation for Berkshire Hathaway's weakness is that investors are worried that Buffett, 78, could soon step aside or pass away. But Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund (TILFX), which holds shares of Berkshire Hathaway, says you shouldn't worry about this."There is no evidence that he is mentally or physically slowing down," says Tilson. Plus, according to insurance company estimates, a healthy 78-year-old lives on average for an additional 15 years, Tilson says. He expects Buffett will be running Berkshire for the next decade.
No. 3: Buffett has lost his Midas touch
Like any good investor, Buffett readily admits he makes mistakes. But the recent numbers are shocking.The value of unrealized gains on his stock holdings fell $7 billion by the end of the second quarter compared with the end of 2007, and unrealized losses grew to $3.9 billion from about $1 billion.
Two of his biggest turkeys are newspaper companies: Gannett (GCI, news, msgs) is down 61% in the past year, and The Washington Post (WPO, news, msgs) has shed 20%.
Do these big losses mean that Buffett's brain has actually gone into retirement without giving notice?
I doubt it. First off, Buffett's holdings are bought "for life," as he likes to say. So it's unfair to judge them over the short term. Even if you do this, you can make the case that Buffett's performance is telling us his brain is working better than ever. Because so far this quarter, Buffett has turned in an enviable performance.
As of Sept. 23, his holdings were up 9% during the third quarter, compared with a 5.9% decline for the S&P 500, according to an analysis of his portfolio by Bespoke Investment Group, an investment research shop. His best performers were Wells Fargo (WFC, news, msgs), SunTrust Banks (STI, news, msgs), Bank of America (BAC, news, msgs), Kraft Foods (KFT, news, msgs) and Lowe's (LOW, news, msgs), up anywhere from 15% to 47% so far during the quarter.
Buffett's real problem
The real reason Berkshire Hathaway stock is weak is that despite Buffett's investment prowess, his company is still mainly a property and casualty insurance business.And that's been a terrible business of late because pricing is so weak in property and casualty insurance, as well as most other segments of the sector, says Stephen Shueh, a managing partner at Roundview Capital. Shueh is a value investor who holds Berkshire Hathaway shares.
The problem is that -- Hurricane Ike notwithstanding -- there haven't been big disasters in the recent past to force insurers to make big payouts. Insurance companies have been growing fat on excess capital from all those premiums coming in. As they gain capital strength, they can offer more insurance -- but to win business, they have to lower prices.
Over the past year, commercial insurance pricing is off 5% to 6%, says John Iten, a senior analyst in Standard & Poor's insurance group. And pricing in reinsurance is down 10%, Iten says. Reinsurance is one of Buffett's fortes. It involves offering insurance to other insurance companies who write policies against major catastrophes.
All of this helps explain why Berkshire Hathaway's insurance earnings -- before taxes -- fell 20% in the second quarter and net income fell 7.6% to $2.88 billion. Both fell sharply in the first quarter as well.
Continued: 'The party is over'