Despite slump, Berkshire bested S&P 500

January 04, 2009|Associated Press

NEW YORK - Billionaire Warren Buffett's Berkshire Hathaway Inc. slumped 32 percent last year, the worst performance in more than three decades, as the recession forced down the value of the firm's equity holdings and derivative bets.

Most of the stock decline happened in the last three months as Berkshire posted a fourth straight profit drop amid sagging insurance results. The company still beat the 38 percent tumble of the Standard & Poor's 500 index, the 14th year in 20 that Buffett outperformed the benchmark. Just six of 1,591 US stock mutual funds with at least $250 million in assets made money for investors last year, according to data compiled by Bloomberg.

Buffett poured money into stocks as prices fell and increased Berkshire's pace of deals as the contraction in credit markets hobbled buyout firms. Buffett spent about $3.9 billion on equities in the third quarter, making Berkshire the biggest shareholder in ConocoPhillips, the second-largest US refiner. Berkshire revealed 12 acquisitions in 2008, compared with eight in 2007, and also agreed to buy $8 billion in preferred shares from Goldman Sachs Group and General Electric Co.

Most of the top holdings in Berkshire's stock portfolio, valued at $76 billion as of Sept. 30, declined at least 15 percent in the last three months of 2008. ConocoPhillips plunged 29 percent in the fourth quarter. Coca-Cola Co., Berkshire's top holding, dropped 14 percent, and number two Wells Fargo & Co. plummeted 21 percent.

Declines in the value of derivatives also pressured Berkshire shares. Buyers of the contracts would be entitled to billions of dollars from Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019. Buffett said the liability on the contracts was $6.73 billion at the end of the third quarter. Berkshire has collected $4.85 billion on the contracts and can profit from investing the funds, the firm said.

All four indexes, including the S&P 500, would have to fall to zero for Berkshire to be liable for the entire $35.5 billion that's at risk, Buffett said in November. Acknowledging investor concern, Buffett has said he'd provide more information on how he calculates losses on the contracts.

The firm's annual report for 2008 will disclose "all aspects of valuation" and cover "deficiencies in the formula" for pricing the derivatives, "which we nevertheless use," Buffett said in an e-mail sent by an assistant in November.