Saturday, November 22, 2008

* Is The Financial Crisis Getting the Best of Warren Buffett?

Through November 21, 2008, Berkshire Hathaway's (BRK.A) year-to-date return was -36.4%. Since last December 11th when Class A shares hit its record high of $151,650, it has lost nearly half its value closing at $77,500 on Thursday; its lowest level since August 2003. This has not gone unnoticed by shareholders. Some investors have lost confidence in the ability of BRK to pay its debts.

After the collapse of AIG driven by derivatives, many investors fear the same could happen to other insurance companies including BRK.A. Berkshire could have to pay as much as $37 billion between 2019 and 2027 under some derivative contracts if the S&P 500 index and three other stock indexes are lower than when Berkshire entered the contracts.

Most insurance companies shares are significantly down since October 1st compared to the S&P 500. During that period, AFLAC Inc. (AFL) is down 41.9%, Manulife Financial Corp (NYSE:MFC) is down 60.5% and BRK.A is down 34.7%, while the S&P 500 is down 31.1%.

Derivative exposure is not the only problem facing BRK.A. The stock price of General Electric Co. (GE) and Goldman Sachs Group Inc. (GS), have fallen, rendering Mr. Buffett’s warrants to buy common shares worthless for the time being.

Personally, I think the situation is playing to BRK.A's strength - a strong balance sheet. As its competitors lose capital, they will be more conservative in writing new business. BRK.A may well step in and fill the void. What BRK.A currently owns may be worth less, but Buffett will get more opportunities to buy things at cheap prices and once again come off looking like a genius.

Full Disclosure: Long AFL, MFC, GE

Tags: [AFL] [BRK.A] [GE] [GS] [MFC]