Why Buffett's Not a Buy

10/15/2008 11:50 am EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says it’s better to buy companies Warren Buffett is buying rather than Berkshire Hathaway itself.

With more than a hundred investments carefully handpicked by the Oracle of Omaha and his disciples—plus a huge cash hoard of $28 billion—Buffett's Berkshire Hathaway (NYSE: BRK.A) was supposed to be a bastion of safety in this turbulent market.

But Buffett, or at least Berkshire, hasn't been immune to the market's volatility. Before as recent run, it was down 20% since early December, only slightly better than the 22% decline of the Standard & Poor’s 500 index index over the same time.

Understandably, many Berkshire Hathaway investors feel shaken. They're wondering whether Buffett has finally turned into an investing has-been.
Oh, he's still wealthy enough to rank [ahead of his friend and Microsoft’s co-founder Bill Gates as the world’s wealthiest person, with an estimated net worth of $TK billion.]

One explanation for Berkshire Hathaway's weakness is that investors are worried that Buffett, 78, could soon step aside or pass away. But Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund (TILFX), which holds shares of Berkshire Hathaway, says you shouldn't worry about this.

"There is no evidence that he is mentally or physically slowing down," says Tilson. He expects Buffett will be running Berkshire for the next decade.

The real reason Berkshire Hathaway stock is weak is that his company is still mainly a property and casualty insurance business.

And that's been a terrible business of late because pricing is so weak in property and casualty insurance, as well as most other segments of the sector. Over the past year, commercial insurance pricing is off 5% to 6%, says John Iten, a senior analyst in Standard & Poor's insurance group. And pricing in reinsurance is down 10%, Iten says. Reinsurance, one of Buffett's fortes, offers insurance to other insurance companies who write policies against major catastrophes.

All of this helps explain why Berkshire Hathaway's insurance earnings—before taxes—fell 20% in the second quarter and net income fell 7.6% to $2.88 billion. Both fell sharply in the first quarter as well.
In his most recent letter to shareholders, Buffett warned investors that it was "a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008."

The other problem, of course, is that Buffett has collected a lot of companies with direct exposure to the housing sector. These businesses have been hit hard by weakness in the economy.

If you want to try your hand instead at individual holdings in the Berkshire Hathaway portfolio, consider stocks that Berkshire added to during last quarter.

At $20 a share, utility NRG Energy (NYSE: NRG) trades about 50% below where Berkshire probably bought last quarter.

Berkshire also added to Sanofi-Aventis (NYSE: SNY), a pharmaceutical company with most of its sales in the US and Europe, and Ingersoll-Rand (NYSE: IR), which sells industrial equipment such as climate control and security systems. Morningstar analysts have five-star ratings on both companies.

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