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Buffett's timing was off in strategy on dollar

Section: Daily Dispatches

And people complain that Bill Murphy
is always bullish on gold and silver!

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By George Stein and Josh P. Hamilton
Bloomberg News Service
via International Herald Tribune, Paris
Monday, August 7, 2006

The billionaire investor Warren Buffett, stung by $955 million in losses from foreign-currency investments in 2005, cut his bet against the U.S. dollar this year, just before its steepest decline in 18 months.

Berkshire Hathaway, his insurance and investment company based in Omaha, Nebraska, had $5.4 billion in foreign-currency forward contracts at the end of March, down from as much as $21.8 billion in 2005, according to the company's earnings statements released last week. The U.S. Dollar Index, which is used to measure the dollar's value against six major currencies, fell 5.1 percent in the second quarter.

"It was the wrong timing," said Samarjit Shankar, director of foreign- exchange global strategy at Mellon Financial, based in Boston. "Even as shrewd an investor as Buffett can miss the timing sometimes."

Buffett, 75, dubbed the world's greatest investor by the biographer Robert Hagstrom, told investors in his annual report in March that he cut the contracts in favor of a new hedge against a declining dollar, buying interests in companies outside the United States.

The $4 billion purchase of an 80 percent stake in the Israeli toolmaker Iscar Metalworking, Buffett's first international acquisition, raised separate concerns as Hezbollah fighters fired rockets in the range of the plant in Tefen, near the Lebanon border.

"With the fighting, there's uncertainty," said Donald Thorpe, an insurance analyst at Fitch Ratings in Chicago. "Those assets are more at risk now."

Berkshire Hathaway reported late Friday that second-quarter profit rose 62 percent as investments benefited from higher U.S. interest rates and the weakening dollar.

Net income climbed to $2.35 billion from $1.45 billion a year earlier, the company said. The company had an $87 million gain on its foreign-currency position after a loss a year earlier. Still, Berkshire cut its currency contracts by $4.2 billion during the quarter to $1.2 billion.

"If he had kept the bet at the same size he had a year ago, he would have made even more, a lot more," said Mohnish Pabrai, a fund manager at Pabrai Investment Funds in Irvine, California. Still, "this is a blow-out quarter."

Iscar, purchased by Berkshire on July 5, was not included in the second- quarter results.
The company closed its Tefen plant last month and planned to have employees work nights and weekends when it re-opened to avoid delays in deliveries, the Iscar chairman, Eitan Wertheimer, said last month.

Predicting that the U.S. current account deficit would hurt the dollar, Buffett began using forward contracts as a bet against the currency in 2002.

In the first three years, Berkshire recorded $2.96 billion in gains as the U.S. Dollar Index, which measures the dollar against the euro, yen, Swiss franc, British pound, Canadian dollar and Swedish krona, fell 31 percent. Last year, the index rose 13 percent.

"My views on America's long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged," Buffett wrote in his annual letter to shareholders in March. "My conviction, however, cost Berkshire $955 million pretax in 2005."

Buffett, who did not respond to requests for comment, told investors that he scaled back his holdings of foreign currencies as U.S. interest rates rose relative to the rest of the world. Unlike changes in the value of stock or bond holdings, accounting rules require that fluctuations in currencies and derivatives be reflected in earnings reports.

"We don't know until well after the fact whether he's right or wrong," said Frank Betz, a partner at Carret Zane Capital Management of Warren, New Jersey, referring to Buffett's investment decisions. "Most of the time, he's right. Sometimes he gets a little egg on his face, and he comes out all apologetic."

Berkshire, which relies on insurance for about half the company's profit, reported $132 million more interest and dividend income than had been forecast by Charles Gates, an analyst at Credit Suisse Group in New York, as the insurance units ended the quarter with $37.3 billion in short-term investments equivalent to cash. The U.S. Federal Reserve raised short-term interest rates 2 percentage points to 5.25 percent in the year ended June 30.

Buffett "went into short-term cash a few years ago. Now that's paying off," said Guy Spier, whose hedge fund Aquamarine, based in New York, holds $11 million of Berkshire stock. Shares of Berkshire have risen 3.5 percent this year, compared with a 4.8 percent decline in the KBW Insurance index and a 6.7 percent increase in the New York Stock Exchange composite index.

Profit from underwriting the policies fell 1.3 percent to $371 million, higher than Gates's $305 million estimate, as a decline at the auto insurer Geico countered gains at the reinsurer General Re, which benefited from there being fewer catastrophe losses outside the United States.

In June, Buffett changed his plan for his own stock holdings, saying that he would begin donating his Berkshire shares to charity now, rather than upon his death. Over time, he will give 85 percent of his stock to the Bill and Melinda Gates Foundation and four family charities, he said.

The stake was valued at about $37 billion at the time of the announcement.