Buffett loses US$ 10 bn in a week - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Buffett loses US$ 10 bn in a week 

A  A  A

In this issue:
» Buffett's portfolio takes a big hit
» Bank bailouts in the offing
» World's economic engines slowing down
» Oil's sharp decline
» ...and more!

00:00 Buffett's portfolio takes a big hit
Not even Warren Buffett, the world's preeminent stock picker, could avoid losses as markets around the world tumbled last week. A 21% decline in Coca Cola and 18% in Wells Fargo has caused a 17% decline in his portfolio in the week gone by. In all, the losses amount to a whopping US$ 10 bn. Overall, Berkshire's stock price is down 20% this year (compared to S&P 500 Index's 39% decline), its first annual decline since 2001 when it fell about 6.2% and second since 1965.

So is Buffett worried? For someone who's held on to these stocks for almost two decades now (he bought Coca Cola and Wells Fargo in 1988 and 1990 respectively), weekly declines like these do not ring panic bells. In fact, Buffett has said so many times in the past that he views market declines as opportunities to invest.

And he's walking his talk. Known for picking undervalued companies with durable advantages over competitors, Buffett has invested a total of US$ 8 bn in preferred shares of Goldman Sachs, the most profitable Wall Street firm, and General Electric Co. that pay a 10% dividend. This means that these investments will earn Berkshire US$ 800 m annually unless these companies were to collapse, which seems highly unlikely.

"Wells Fargo had a small decline in earnings because of the popping of the real estate bubble. Nevertheless, I believe its intrinsic value increased relative to competitors," he says.

And this is what he had said while making the decision to buy Wells Fargo way back in 1990 - "Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings."

Isn't the current situation similar to that of 1990? There is a chaotic market in bank (and financial) stocks. Foolish loan decisions of once well-regarded banks are daily put on public display. One huge loss after another is being unveiled. Investors don't seem to trust banks' numbers. And Buffett is buying bank stocks - only those that have strong competitive advantages, best managers at helm, low leverage and generating high return on capital.

------- Don't Miss! -------
The Equitymaster Stock Market Yearbook 2009

Your unbiased guide to 200 top Indian companies.

Releasing shortly. Book your copy today!

Know more...

01:31 Bank bailouts in the offing
With credit literally freezing as banks become vary of lending to one another on fears of more losses on their books, governments across the developed world are looking to assume control. Just as the subprime crisis was born in the US and spread to Europe, so has government intervention spread from the US shores to countries around the world.

A country that prided itself on its free market mechanism and least government intervention is now being forced to painfully watch this situation reverse. And the US$ 700 bn bailout package that was passed in the US has in some sense 'inspired' European central bankers to also swing into action and buy stakes in their important banks so that they can function normally. The numbers are staggering. Britain is pumping in £ 45 bn in four of its top banks. Australia and New Zealand have guaranteed bank deposits, Indonesia has raised its bank guarantee and India plans to inject more liquidity into its financial system.

Interestingly, Asian nations are being called upon to impart advice on the reshaping of the financial world. Readers would do well to recollect the fact that the Asian economies badly burnt their fingers in the crisis of 1997 causing them from thereon to pile up huge amounts of forex reserves. Given that developed countries are running helter-skelter to raise cash, the strong reserves of these Asian countries give them an edge indeed!

02:23 5,4,3...??
No, this isn't a countdown for the unfolding of some big event. Rather, the numbers denote global economic growth rates of the past as well as the future. IMF, in its world economic outlook last week, has projected global growth to slowdown to 3% next year. The same stood at 5% in 2007 and is expected to grow at 4% in the current year. This is because two of the biggest engines viz. American consumer spending and growth in emerging markets are showing signs of sputtering, thanks to the credit crisis. American consumers, on aggregate have turned poorer by US$ 2 trillion from decline in stock markets alone. This is going to have a big impact on their psyche, forcing them to go into a shell and postpone discretionary spending.

As per Bloomberg, the US consumer spending, after growing uninterruptedly since 1991, finally gave way last quarter in the face of rising unemployment, declining wealth and tightening credit. This has even led to some of the experts predicting that the world could be headed for a worst recession since 1991. It has to be borne in mind that the IMF defines growth of 3% and less as a recession. Hence, by that yardstick, 2009 could likely end up being a recession year.

03:11 Oil's free fall
What made headline news a couple of months back is now on the back burner amidst the more important news of central banks acting to save the world economy from shifting into a deep slump. We are talking about crude oil prices, which have declined by almost 45% since hitting their all time high of US$ 147 a barrel in July 2008. A barrel now costs US$ 80.

The sharp decline in oil prices has been brought about by expectations of slowing demand on the back of deteriorating economic conditions worldwide. The International Energy Agency (IEA) has in fact projected that global oil demand will rise a meager 0.5% in 2008. This will be the slowest annual rise since 1993, when demand actually declined by 0.2% YoY.

Now what is interesting here is that experts who were predicting a US$ 200 a barrel of crude have slashed their target by a whopping 75%! Goldman Sachs, which came out with its famous US$ 200 a barrel prediction for crude, now says that the commodity is more likely to be at US$ 70 at the end of this year. And it might even go to US$ 50 a barrel if the turmoil cuts deeper into the demand for oil.

We find it ironical that the super spike report came out when the crude price was climbing rapidly towards its all time high. Now that there is a slump in the prices of the commodity, the same firm does an about turn in its views. Now this makes even fortune-tellers look good!

04:15 In the meanwhile...
Hopes of tangible benefits emanating from last week's rescue packages announced by the US and European governments have aided the global stock markets today. Indian markets recovered sharply from the meltdown seen last week, as the benchmark BSE-SensexBSE-30 index gained almost 800 points. Statements on the strength of the financial system from the Finance Minister also went a way in soothing nerves in India today.

Strong gains were also recorded in other key Asian markets. Leading the pack were the indices in Hong Kong (up 10%) and Singapore (up 7%). European markets have also opened in the positive.

Gold prices in India fell today on the back of a weaker dollar. However, buyers of the yellow metal remain on the sidelines probably expecting a bigger fall. As a matter of fact, gold has an inverse relationship with the US dollar as the two compete for funds.

In the meanwhile, inflation figure as reported late last week have is currently at its 15-week low. The Wholesale Price Index based inflation for the week ended September 27 has come in at 11.8%, down from the 11.9% rate recorded in the preceding week. Apart from the decline in crude oil prices, inflation has declines on the back of lower prices of farm products such as fruits, vegetables, pulses and cereals.

04:50 Today's investing mantra
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "Buffett loses US$ 10 bn in a week". Click here!



Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407