"Investing is most intelligent when it is most business-like"
A South African-American Perspective
Thursday, April 29, 2010
Buffett: The Good, The Bad, The Unknown
In 1976, Berkshire began accumulating an equity stake in auto insurer Geico, 24 years after selling an earlier stake for $15,259. It finished buying Geico in 1996. The acquisition brought aboard Tony Nicely, who still runs Geico and whose leadership Buffett has lavishly praised, and Lou Simpson, whom Buffett has said could replace him as Berkshire's chief investment officer but for the fact that he, too, is in his 70s.
In 1989, Berkshire bought $600 million of preferred stock in Gillette, the razor blade maker that had been hurt by the introduction of disposable razors. In 2005, Gillette was acquired by Procter & Gamble . Berkshire at year end still held a 2.9 percent stake worth $5.04 billion, and for which it had paid just $533 million.
Berkshire owns 200 million Coca-Cola shares, an 8.6 percent stake it had amassed by 1994. The stake was worth $11.4 billion at year end. Berkshire paid $1.3 billion for it.
In 1993, Berkshire bought Dexter Shoe for $433 million in stock. Eight years later, it folded the struggling company into another business.
In 2008, Buffett amassed a large stake in oil company ConocoPhillips , not expecting oil prices to fall by about three-fourths from their record high. Berkshire spent $7.01 billion on Conoco shares, but has been reducing its stake.
Buffett has entered into derivatives contracts, most of which are essentially bets on the long-term direction of stocks and junk bonds. Berkshire has four major types of contracts
Berkshire has equity index "put" options tied to where the Standard & Poor's 500, Britain's FTSE 100, Europe's Euro Stoxx 50 and Japan's Nikkei 225 trade between June 2018 and January 2028.
Berkshire has contracts tied to credit losses in higher-risk "junk" bonds, which at year end were on average expected to mature in two years.
Berkshire wrote credit default swaps on various companies, mostly investment-grade.
Berkshire entered into tax-exempt bond insurance contracts structured as derivatives.
In September 2008, at the height of the financial crisis, Berkshire acquired $5 billion of Goldman Sachs preferred shares that throw off a 10 percent dividend, plus warrants to buy an equivalent amount of common stock. The warrants carry a strike price of $115.