Buffett Stock Picks Beat Financials Index as He Dodged Subprime

Nov. 26 (Bloomberg) — Billionaire Warren Buffett’s decision to increase his stake in financial companies led by Wells Fargo & Co. and U.S. Bancorp and avoid subprime lenders is paying off for Berkshire Hathaway Inc.

Berkshire’s bank-related investments rose 36 percent in the third quarter, while the 84-member Standard & Poor’s 500 Financials Index declined 0.1 percent. Berkshire, based in Omaha, Nebraska, ranked as the biggest shareholder of Wells Fargo and U.S. Bancorp at the end of September, according to data compiled by Bloomberg.

“In one word, I can sum it up: patience,” said William Frels, chief executive officer of Mairs & Power Inc. in St. Paul, Minnesota, which owns shares of Wells Fargo and U.S. Bancorp and has Berkshire stock in some client accounts. “Warren has the luxury of being able to exercise patience, where most of the other players are under the gun to make things happen and can’t sit around and wait for opportunities.”

A weighted basket of Berkshire’s financial stocks rose at an average quarterly rate of 2.3 percent during the past year through September, Bloomberg data show. The S&P financials dropped by an average 11.4 percent per quarter in the same stretch. The index slumped 60 percent this year as new home sales fell to the lowest in 17 years.

As chairman and chief executive officer of Berkshire, the 78-year-old Buffett makes most of the company’s investing decisions. Buffett, whom Forbes magazine calls the country’s wealthiest man, declined to comment for this story. Berkshire has gained at an average annual rate of 21 percent over the past two decades, exceeding the 12 percent advance of the S&P 500 Index.

Bank of America

Berkshire’s financial investments have dropped 32 percent since Sept. 30, excluding a $5 billion investment in Goldman Sachs Group Inc., reducing Buffett’s profits. The S&P financials index fell 41 percent in the period.

Berkshire’s third-quarter holdings, released this month, show the company trimmed its stake in San Francisco-based Wells Fargo by a tenth of one percent since June to 290.4 million shares, valuing the investment at $7.8 billion as of yesterday. Berkshire increased its holdings of Minneapolis-based U.S. Bancorp by 6.3 percent to 72.9 million shares. Berkshire kept its stake in New York-based American Express Co. at 151.6 million shares, remaining the credit-card company’s biggest investor.

The only financial company Berkshire moved away from in the third quarter was Charlotte, North Carolina-based Bank of America Corp., cutting its stake to 5 million shares from 9.1 million. Bank of America did what Buffett refused to do — buy Countrywide Financial Corp., the subprime lender plagued by tumbling home prices and record foreclosures.

Goldman Sachs Investment

Buffett said in October 2007 that he “never came close” to acquiring Countrywide shares. He also has denied reports he considered buying part of Bear Stearns Cos., the New York-based securities firm later bailed out by JPMorgan Chase & Co.

“The fact that he was smart enough to take a pass on so many deals that have gone sour indicates that he correctly saw that things were going to get worse,” said Whitney Tilson, managing director of New York-based hedge fund T2 Partners LLC, which has been adding to its Berkshire holdings.

The Goldman Sachs investment has yet to bear fruit. Berkshire agreed to buy $5 billion of the New York-based company’s perpetual preferred shares on Sept. 23 and received warrants for another $5 billion at $115 a share. The stock has since tumbled 43 percent to $71.78. Still, Buffett will get a 10 percent annual dividend on the preferred securities.

Stock Plunges

Berkshire Class A shares dropped by 32 percent this year, and 12 percent in October, the worst month since 2000, as the company’s profit fell for four straight quarters. Berkshire gained $8,900 yesterday to $96,400 in New York Stock Exchange composite trading. The company’s other financial investments are M&T Bank Corp., SunTrust Banks Inc., Torchmark Corp. and Wesco Financial Corp.

Buffett wrote in a New York Times column that he’s buying U.S. stocks and may shift his personal investments into equities.

“He’s right,” said Frels, 69, who entered the investing business in 1962. “With the decline, U.S. stock prices appear quite reasonable.”

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