Buf­fett prefers stocks to bonds

Winnipeg Free Press - - NEWS -

WAR­REN Buf­fett, the bil­lion­aire chair­man and chief ex­ec­u­tive of­fi­cer of Berk­shire Hath­away, said the rally in markets over the last sev­eral years has made it harder to find bar­gains, but that stocks re­main his choice over bonds.

Asked why cash has been pil­ing up at Berk­shire, he told Bloomberg Tele­vi­sion’s David Westin, “It tells us stocks aren’t as cheap as they’ve been most of the time.” Buy­ing shares after the 2008 fi­nan­cial cri­sis, Buf­fett said, was like “shoot­ing fish in a bar­rel.”

In a sep­a­rate in­ter­view Wed­nes­day with CNBC, the Berk­shire CEO said he con­tin­ued buy­ing stock in Ap­ple this year, even as one of his deputies was sell­ing. And he tamped down spec­u­la­tion that Kraft Heinz would pur­sue a takeover of Mon­delez In­ter­na­tional Inc. Berk­shire is the largest share­holder in Kraft Heinz and con­trols the com­pany along with buy­out firm 3G Cap­i­tal.

Buf­fett, 87, built Berk­shire into a sprawl­ing con­glom­er­ate over the past five decades through shrewd stock picks and takeovers. The com­pany’s dozens of sub­sidiaries now in­clude in­sur­ers, man­u­fac­tur­ers, re­tail­ers and a rail­road. Its stock port­fo­lio — which in­cludes multi­bil­lion-dol­lar stakes in com­pa­nies like Wells Fargo & Co. and Coca-Cola — was val­ued at more than US$135 bil­lion at the end of June.

Stocks “have got­ten less at­trac­tive as they’ve gone along,” Buf­fett told Westin. “They’re still very at­trac­tive com­pared to bonds” be­cause in­ter­est rates are so low.

The S&P 500 is in its sec­ond-long­est bull mar­ket on record, hav­ing more than tripled since March 2009 in a rally that has added al­most US$19 tril­lion to share val­ues. In 2017 alone the gauge has closed at record highs 30 times.

Even as val­u­a­tions make it harder for Buf­fett to find new in­vest­ments, some of his older ones are pay­ing off. On Tues­day, Bank of Amer­ica said that Berk­shire had con­verted its pre­ferred stake into com­mon shares. The trans­ac­tion locked in a pa­per gain of more than US$11 bil­lion on an in­vest­ment Buf­fett made six years ago, when the bank’s shares were tum­bling amid probes tied to the hous­ing melt­down.

“They were in sig­nif­i­cant trou­ble, but that’s like a great ath­lete be­ing in the hos­pi­tal for an ac­ci­dent,” he told Westin. The de­ci­sion to con­vert the stake, he added, was “fairly au­to­matic” since Bank of Amer­ica’s com­mon shares now pay a higher div­i­dend than the pre­ferred did.

In ad­di­tion to Ap­ple, Buf­fett has been find­ing some smaller in­vest­ments this year. In June, he threw a life­line to Home Cap­i­tal Group, an em­bat­tled Cana­dian home lender.

Its share­hold­ers are sched­uled to vote on a sec­ond part of that trans­ac­tion next month, which would in­crease Berk­shire’s stake from al­most 20 per cent to 38 per cent.

Find­ing com­pa­nies Berk­shire can take con­trol of has been a big­ger chal­lenge lately for Buf­fett. Ear­lier this month, his bid to buy the ma­jor­ity of On­cor Elec­tric De­liv­ery, Texas’s largest power dis­trib­u­tor, fell apart. That failed ef­fort came six months after a Berk­shire-backed deal to buy Unilever hit the skids.

The col­lapse of two high-pro­file pur­suits in such a short time frame is a rar­ity for Buf­fett, who did his last ma­jor deal in 2015 when Berk­shire agreed to buy aero­space-parts man­u­fac­turer Pre­ci­sion Cast­parts for more than US$35 bil­lion.

The deal drought has big­ger im­pli­ca­tions for Berk­shire. The com­pany doesn’t pay a div­i­dend and rarely buys back its own stock, so fail­ing to con­sum­mate ma­jor trans­ac­tions means cash piles up from its sub­sidiaries. At the end of June, Berk­shire had just shy of US$100 bil­lion.

SUP­PLIED

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