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While most investors panicked or were forced to sell, Berkshire Hathaway chairman Warren Buffett put more than $20 billion to work last year, positioning his insurance-focused conglomerate to profit if the economy and markets recover in coming years.
As 2008 began, Berkshire had more than $44b. in cash, partly because Buffett had struggled to find attractively priced investments and acquisitions in recent years. The biggest recent acquisition had been Berkshire's purchase of 80 percent of Israeli metal-cutting-tool maker Iscar Metalworking Cos. for $4 billion in 2006.
But he topped that several times during the past year. By the end of September, Berkshire held $33.4b. in cash.
In March, Berkshire bought 60% of Marmon Holdings for $4.5b. In July, it invested $3b. in Dow Chemical convertible preferred stock. Another $6.3b. went into subordinated notes and preferred shares of Wm. Wrigley Jr. Co.
Berkshire also offered to acquire Constellation Energy for about $4.7b. and invested $1b. in the company's convertible debt. Deep in the midst of the financial crisis, Buffett bought $8b. of preferred stock in General Electric and Goldman Sachs.
Berkshire also boosted some of its equity holdings in companies such as ConocoPhillips, Burlington Northern and US Bancorp.
"He hadn't really added to his stock-market investments in the previous decade, which shows remarkable restraint," said Mark Sellers, managing partners of hedge fund Sellers Capital LLC. "He was a bomb waiting to explode; as soon as stocks got cheap, he immediately released."
Buffett is considered one of the world's best investors, so when he puts this much money to work, other investors take note and sometimes follow his lead.
"He's in a different position, but individuals with long-term investment horizons can take guidance from him," said Justin Fuller, a partner at Midway Capital Research & Management and editor of the Web site Buffettologist.com. "While everyone's been screaming and running for cash, he's been planting great investment seeds for the next 10 to 15 years."
Buffett is able to gauge investment success over many years, while other investors, such as hedge funds, are judged over shorter periods, giving the Berkshire chairman a "huge advantage," Fuller said.
Indeed, Buffett sounded bullish about the long-term outlook for the US economy, but bearish in the short term, during an interview with Fox Business News in late November.
"I'm not worried about how we come out in the end," he said. "I mean, I'm not worried about five years from now. Five months from now could be very painful."
Berkshire shares fall
The financial crisis gave Buffett many more opportunities to invest, but it also hit shares of Berkshire hard, pushing the Class A stock down more than 30% in 2008.
Many of the businesses Berkshire owns are related to the housing industry, such as HomeServices of America, Clayton Homes and Shaw Industries, so the company has suffered from the slumps in residential real estate and in home building.
But a more likely reason for the drop in Berkshire stock was that the company was swept up in a general rush for cash among investors, especially those being forced to sell positions to return money to clients, according to Fuller.
"People were looking around for what they could sell to meet redemptions and Berkshire had held up relatively well for most of the year, so it was a good candidate," he explained.
At the height of the crisis in late November, Berkshire's Class A shares dropped as low as $74,100. They've recovered to $99,990 but remain well below the record high of more than $150,000 reached in late 2007.
"When the stock rose past $100,000, there was a lot of attention," Fuller said. "But now you can buy the stock for less than that and the company is worth more, given the additional businesses it owns and the cash it still has."
Fuller doesn't personally own Berkshire shares, but Midway Capital holds Berkshire shares for the firm's clients.
Good, not great
Another concern may be that Buffett moved too quickly to invest in companies like General Electric and Goldman Sachs, according to Sellers.
On September 23, Berkshire agreed to invest $5b. in perpetual preferred stock issued by Goldman. Buffett also got warrants to purchase $5b. of Goldman common stock with a strike price of $115 a share.
Goldman shares have dropped more than 30% since then. The stock now trades below $90.
General Electric shares have also lost roughly 30% since Berkshire invested in a similar deal at the start of October.
"He may have jumped a little quickly," Sellers said. "General Electric and Goldman were good deals, not great deals."
Still, Buffett's restraint over the previous decade shows, according to Sellers, why "he's the greatest investor of all time."
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