NYT: Closely Watched Buffett Recalculating His Bets

Published September 8, 2009

Warren E. Buffett has two cardinal rules of investing. Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.

Well, a lot of old rules got trashed when the financial crisis struck — even for the Oracle of Omaha.

At 79, Mr. Buffett is coming off the worst year of his long, storied career. On paper, he personally lost an estimated $25 billion in the financial panic of 2008, enough to cost him his title as the world’s richest man. (His friend and sometime bridge partner, Bill Gates, now holds that honor, according to Forbes.)

And yet few people on or off Wall Street have capitalized on this crisis as deftly as Mr. Buffett. After counseling Washington to rescue the nation’s financial industry and publicly urging Americans to buy stocks as the markets reeled, in he swooped. Mr. Buffett positioned himself to profit from the market mayhem — as well as all those taxpayer-financed bailouts — and thus secure his legacy as one of the greatest investors of all time.

When so many others were running scared last autumn, Mr. Buffett invested billions inGoldman Sachs — and got a far better deal than Washington. He then staked billions more on General Electric. While taxpayers never bailed out Mr. Buffett, they did bail out some of his stock picks. Goldman, American Express, Bank of America, Wells Fargo, U.S. Bancorp — all of them got public bailouts that ultimately benefited private shareholders like Mr. Buffett.

If Mr. Buffett picked well — and, so far, it looks as if he did — his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again. After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled.

“We are not out of problems yet,” Mr. Buffett said last week in an interview, in which he reflected on the lessons of the last 12 months. “We have got to get the sputtering economy back so it is functioning as it should be.”

Still, Mr. Buffett hardly sounded shellshocked in the wake of what he once called the financial equivalent of Pearl Harbor. (An estimated net worth of $37 billion would be a balm to anyone’s psyche.)

“It has been an incredibly interesting period in the last year and a half. Just the drama,” Mr. Buffett said. “Watching the movie has been fun, and occasionally participating has been fun too, though not in what it has done to people’s lives.”

Investors big and small hang on Mr. Buffett’s pronouncements, and with good reason: if you had invested $1,000 in the stock of Berkshire in 1965, you would have amassed millions of dollars by 2007.

Despite that formidable record, the financial crisis dealt him a stinging blow. While he has not changed his value-oriented approach to investing — he says he likes to buy quality merchandise, whether socks or stocks, at bargain prices — Buffettologists wonder what will define the final chapters of his celebrated career.

In doubt, too, is the future of a post-Buffett Berkshire. The sprawling company, whose primary business is insurance, lost about a fifth of its market value during the last year, roughly as much as the broader stock market. While Berkshire remains a corporate bastion, it lost $1.53 billion during the first quarter, then its top-flight credit rating. It returned to profit during the second quarter.

Time is short. While he has no immediate plans to retire, Mr. Buffett is believed to be grooming several possible successors, notably David L. Sokol, chairman of MidAmerican Energy Holdings at Berkshire and also chairman of NetJets, the private jet company owned by Berkshire.

After searching in vain for good investments during the bull market years, Mr. Buffett used last year’s rout to make investments that could sow the seeds of future profits.

Justin Fuller, author of the blog Buffettologist and a partner at Midway Capital Research and Management, said the events of the last year, while painful for many, provided Mr. Buffett with the opportunity he had been waiting for.

“He put a ton of capital to work,” Mr. Fuller said. “The crisis gave him the ability to put one last and lasting impression on Berkshire Hathaway.”

For the moment, however, Mr. Buffett seems to be retrenching a bit. Like so many people, he was blindsided by the blowup in the housing market and the recession that followed, which hammered his holdings of financial and consumer-related companies. He readily concedes he made his share of mistakes. Among his blunders: investing in an energy company around the time oil prices peaked, and in two Irish banks even as that country’s financial system trembled.

Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

Among the stocks Mr. Buffett has been selling lately is Moody’s, the granddaddy of the much-maligned credit ratings industry. Berkshire, Moody’s largest shareholder, said last week that it had reduced its stake by 2 percent.

The shift in Berkshire’s investments suggests Mr. Buffett is starting to worry, said Alice Schroeder, the author of “The Snowball,” a biography of Mr. Buffett.

But Ms. Schroeder said Mr. Buffett was also growing anxious about how he would be remembered. He wants to remain relevant in the twilight of his career, she said, and is taking a more prominent role on the public stage. That shift means ordinary investors are getting a chance to hear more of his sage advice, but it also carries some risk.

“Before, he always made sure to dole out the wisdom with an eyedropper,” Ms. Schroeder said. In the past, Mr. Buffett “said it was a mistake to believe that if you are an expert in one area that people will listen to you in others,” she said.

Whatever his recent missteps, many people, from President Obama down, listen to what Mr. Buffett has to say. He is important in his own right as a billionaire businessman but also because millions of ordinary investors follow his homespun aphorisms, copy his investing strategies and await his pronouncements on the markets.

Mr. Buffett refused to be drawn out on where stocks are headed, but he warned about the dangers of investing with borrowed money, or leverage, which proved disastrous when the crisis hit.

As for regrets, he has a few. His timing was bad, he concedes. He should have sold stocks sooner, before the markets tumbled. Then he served up a Buffettism that any investor might heed:

Asked if anything was keeping him awake at night, he said there was not. “If it’s going to keep me awake at night,” Mr. Buffett said, “I am not going to go there.”

Vanity Fair: Henry Paulson’s Longest Night

Excerpts from article:

In 2006, Goldman Sachs C.E.O. Henry Paulson reluctantly became Treasury secretary for an unpopular, lame-duck president. History will score his decisions, but the former Dartmouth offensive lineman definitely left everything on the field. In private conversations throughout his term, as crisis followed crisis—Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., and so forth—Paulson gave the author the inside track, from the political lunacy and bailout plans to the sleepless nights and flat-out fear, as he battled the greatest economic disruption in 80 years.

As he noted, “There’s a great lack of financial literacy and understanding in this nation, even among college-educated people.” But Paulson did figure out how to behave on the Hill. “There’s a way, keeping full integrity, of answering the questions you want to answer,” Paulson told me in one of our conversations, reflecting on what he had learned about committee hearings. “The thing that scared me was not a question I didn’t know the answer to. Just say, ‘I don’t know.’ The thing that scared me was some question that I knew, and answered correctly, and I’d be in deep doo-doo!” As his tenure wore on, Paulson confessed, “I amuse myself a lot by sitting there sometimes and thinking what would happen if I said, ‘Do you realize what an idiotic question that is?’ "

Click her to read full article

Bill Gross September 09 Investment Outlook Notes

Here are notes from Bill Gross's Sep 09 Investment Outlook article:

• When it comes to whacking golf ball, the possibilities of explanation are endless: For relaxation, for socialization, to get close to mother nature, etc.
• The "new" vs. "old" normal dichotomy was perhaps best contrasted by Barton Biggs when he said he was a "child of the bull market."
• Biggs' point was for as long as he's been in the market, it has paid to buy the dips because markets, economies, profits and assets always rebounded and went to higher level.
• Economies grow, profits grow, just like children do.
• However, the surprise is that there's been a significant break in that growth pattern because of delevering, deglobalization, and reregulation (DDR).
• DDR in combination means that it's time to recognize that things have changed and that they will continue to change for the next decade or even two.
• We are heading towards the new normal which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which government plays a significant role in terms of deficits and reregulation and control of the economy; in which consumers stops shopping until he drops and begins.
• American-style capitalism and the making of paper instead of things. America would consume, then print paper assets and debt in order to pay for it. Developing countries would make things and accept America's securities in return. This game is over and unless developing countries step up and generate a consumer ethic of their own, the world will grow at a slower pace.
• The invisible hand of free enterprise is being replaced by the visible fist of government. The once-successful "shadow banking system" is being reregulated and delevered.
• Global economic leadership. China has spent three times the amount of money (relative to GDP) to revive its economy and managed to grow at a "near normal" 8% pace vs. U.S. "big R" recessionary numbers.
• Old normal housing models encouraged home ownership, eventually peaking at 69% (sometime in 2004). Subsidized and tax-deductible mortgage interest rates promoted a long-term housing boom and now a significant housing bust.
• Housing alone can't lead U.S. out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. Home ownership may sink perhaps to a new normal level of 65%, as opposed to 69% of American households.
• The shadow banking system has fueled an American era of consumerism because debt was available, interest rates were low and the living became easy.
• Saving rates plunged from 10% to -1%. Now things have perhaps changed and saving rates are headed up, consumer spending growth rates moving down. A new normal is taking place.
• Increased health care may be GDP positive but it's only a plus from a "broken window" point of view. It's far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one.
• Same thing goes for energy. Better and more profitable to pump oil than to spend trillions on a new "green" society.
• The investment implications of this new normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes.
• PIMCO observes that the highest probabilities favor the following strategic conclusions: 1) Global policy rates will remain low for extended periods of time; 2) The extent and duration of quantitative easing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories: 3) Investors should continue to anticipate and shake hands with government policies, utilizing leverage and guarantees to their benefit; 4) Asia and Asian-connected economies (Brazil, Australia) will dominate future global growth; 5) The dollar is vulnerable on a long-term basis.
• Investors need to play conservatively and avoid critical mistakes. An "even par" scorecard may be enough to hoist the trophy in a New Normal world.