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» Kirk - Billionaire's reputation buffeted by investigations

Billionaire's reputation buffeted by investigations
By Peter Robison
Bloomberg News

June 5, 2005

Warren Buffett, the second-richest American, lives in a $700,000, five-bedroom house on a maple-lined street in Omaha, Neb. Neighbor Mike McMullen says he sometimes sees Buffett, 74, warming up his Lincoln on winter mornings. The license plate reads: "Thrifty."

Four decades after Buffett bought Berkshire Hathaway Inc., now a holding company worth $129.9 billion, his reputation for honesty and openness is threatened as never before by a wave of federal, state and international investigations of Berkshire's General Re Corp., the largest U.S. reinsurer.

"I know it bothers Warren a lot," says Robert Soener, 80, a retired Omaha stockbroker and Berkshire investor who has been a friend of Buffett since the 1950s when the two taught an investment class at the University of Nebraska at Omaha. "Even if he comes out -- and I know he will -- clean as a whistle, there's still going to be that stigma, not to the stockholders, but to the outside."

Shareholders say they worry that the premium Buffett brings to Berkshire's bonds and stock may be eroding. The company's borrowing costs are rising, and shares have fallen 4 percent this year.

Investors have had a spectacular ride since Buffett took control of Berkshire on May 10, 1965. A $10,000 investment that day would be worth about $47 million today. Berkshire shares have had a compound annual return of 23.5 percent over the past four decades, more than triple the 6.8 percent price appreciation of the Standard & Poor's 500 Index. Soener's stock comes from $15,000 his mother invested with Buffett in the 1950s. He wouldn't say how much the shares are worth now or if he'd sold any.

Now, New York Attorney General Eliot Spitzer, the Securities and Exchange Commission and the Justice Department are examining reinsurance deals of Stamford, Conn.-based General Re.

Rest of article

-- posted by Kirk

» Jas_Jain - Re: Billionaire's reputation buffeted by investigations

Once Buffett had become extremely popular by early 1998, it was a great time to sell BRK.A at $80,000. The second best chance came when he bought Gen. Re. in 2000.

Buffett faithful will be punished for staying too long with a horse that has already delivered more than it could. Blind faith in a persion, or a system, or an institution like the American Scam Market never cease to disappoint and punish people.

Kirk is lucky in that he has developed great trading insticts by exploiting volatility. Think about how great Kirk's perfromance would be if he could trade on both sides by trading some on the long side and some on the short side.

Jas

-- posted by Jas_Jain

» arommel88 - Re: Re: Billionaire's reputation buffeted by investigations

The problem with Warren Buffet is that he has been too successful. A lot of people have read his news letters and there is a lot of me too money managers out there. I have suspected that value based investing could actually turn out to be ironically, pricer than it was in tha past. What is also a factor is that the information is out there and there is much less of a chance of the market missing something in the range that could make a difference for the assets he manages. If Warren finds a good penny stock and doubles his money he could make an easy million, but what good does that do him? He has made mention that he has a structual problem in how big he is. He is now part of the market.

I remember how the market adjusts in college. In and assortment of stategy games it seemed that I got the hang of them rather quickly from the group of friends I happend to be in. I think I understood things like fight battles you can win, concentrate force, use mobilty, calculate odds, feign weakness/strength, use fodder etc. My ability to win began to cause behavior changes as they began not only to look at my tactics but also to double team me. I was able to adjust and keep winning but I could see a potential ceiling effect in the available tactics and counter tactics(some were not even concerned with winning, they were there to make me lose). They were getting better and were it not for graduation cutting it short I suspect I would have had a much tougher time(It was harder and harder to win, in one game 2 players suicided themselves into me. It was too much and I lost). Investing is one of those multi-player games of a sort.

-- posted by arommel88

» Kirk - Probe shrinks Buffett premium

Excerpts:

On Reputation and honesty:

Four decades after Buffett bought Berkshire Hathaway Inc., now a holding company worth $129.9 billion, his reputation for honesty and openness is threatened as never before by a wave of federal, state and international investigations of Berkshire's General Re Corp., the largest U.S. reinsurer.

"I know it bothers Warren a lot," says Robert Soener, 80, a retired Omaha stockbroker and Berkshire investor who has been a friend of Buffett since the 1950s when the two taught an investment class at the University of Nebraska at Omaha. "Even if he comes out -- and I know he will -- clean as a whistle, there's still going to be that stigma, not to the stockholders, but to the outside."

On Valuation and performance:

Shareholders say they worry that the premium Buffett brings to Berkshire's bonds and stock may be eroding. The company's borrowing costs are rising, and shares have fallen 4 percent this year.

On Reinsurance:

Now, New York Attorney General Eliot Spitzer, the U.S. Securities and Exchange Commission and the U.S. Justice Department are all examining reinsurance deals of Stamford, Conn.-based General Re.

Spitzer filed a civil complaint May 26 against New York-based American International Group Inc. and its then-chief executive officer, Maurice "Hank" Greenberg, accusing them of accounting fraud. The complaint said General Re "created false and misleading documentation to satisfy Greenberg's illicit goals" in 2001 to manipulate the financial statements of AIG, the world's largest insurer. Joseph Brandon, General Re's CEO, declined to comment. Greenberg's lawyers issued a statement denying Greenberg had engaged in "any fraudulent conduct."

Also on May 26, Australian regulators said the Australian unit of Zurich-based Zurich Financial Services AG used reinsurance transactions with Cologne-based General & Cologne Re Group, a unit of Berkshire's General Re, to overstate 2000 profit by A$61 million ($47 million). The Sydney-based Australian Prudential Regulation Authority didn't say if General & Cologne knew how its policies were being used. Mark Westfield, a spokesman for General Re in Australia, declined to comment.

The investigations of reinsurance -- coverage one insurer buys to share the risk of underwriting losses with another insurer -- pose high stakes for Buffett. The probes might disrupt General Re, the largest of Berkshire's insurance divisions, which Buffett called "the propellant of our growth" in his annual shareholder letter released March 5.

Investors fear the scrutiny will lead to unwarranted penalties on reinsurers, says Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pa., which has about 15 percent of its $2 billion under management in Berkshire shares.

On corporate governance:

The probes might also increase pressure on Buffett to alter Berkshire's governance policies and the makeup of its board. They could as well challenge the acknowledged hands-off way he manages the company's 65 operating companies from his offices in Kiewit Plaza, an unassuming gray building across from an Omaha strip mall.

"He has a very iconoclastic view of corporate governance that I don't think anyone but Warren Buffett could get away with," says Patrick McGurn, senior vice president of Rockville, Md.-based Institutional Shareholder Services, which advises fund managers on governance.

"That could come back to hurt them as people look at reinsurance practices at Berkshire," says McGurn, 44.

Among Buffett practices cited by McGurn: Selecting a board that, aside from Buffett's son, is composed exclusively of business partners and friends -- including Microsoft Corp. Chairman Bill Gates -- and providing little information about who will eventually succeed Buffett as chairman and chief executive officer at Berkshire.

I'm sure Warrenn Buffett will come out all right after all this clears, but the huge premium he's had just for being "The Oracle of Omaha" has been evaporating which means people who've invested in his company in recent years have far less to cheer about than those who invested with him when he was much, much smaller. In the end, being big can hurt you.

I've heard Buffet said he could get 50% a year returns if he "only" had $1M a year to manage. I wonder now if he means 15% a year compounded given his feelings the markets don't hold the value they once had? I calculate Buffett has only generated 2.7% annual returns since 12/31/98. Check my math, but I think he'd be quite pleased with 15%.

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