For years Warren Buffett was, by most reckonings, the richest man in the United States. And for years, as if to confound his fans and followers, he advocated a larger government and higher taxes. He endorsed statist proposals for government-run healthcare; he supported Barack Obama for president.
Now Buffett is no longer the richest man in the land. According to Forbes magazine, that title reverts to its previous holder: Microsoft Corp. founder Bill Gates. Buffett’s estimated net worth has fallen from over $60 billion to about $37 billion in the past 18 months.
Is there a connection between Buffett’s support of big government schemes and his humbler financial standing? Markets don’t punish billionaires for their politics. A truer take might be that Buffett saw trouble on his horizon and supported policies and politicians that would help his portfolio. There’s pragmatism in that; but also some hypocrisy.
Buffett runs Berkshire Hathaway, Inc. The man and the company have become virtually synonymous. Berkshire Hathaway owns various businesses and makes investments in other large corporations. It’s a kind of mutual fund, with a heavy concentration in insurance companies and other financial services firms. Why insurance companies? Because Buffett believes Wall Street doesn’t value them fully.
Buffett has long espoused the investment principles of Benjamin Graham, an investor and writer who championed so-called “value investing.” This involves detailed analyses of the financial reports of publicly traded companies and then broader analyses of the marketplaces in which those companies operate. It’s a labor-intensive process.
But Buffett’s bets on insurance have never matched up well with Graham’s model. Insurance is a heavily-regulated industry; success in the field is often based on close relations with regulators. For decades, insurance has been a. quiet channel for statist influence on the larger economy. From this angle, Buffett’s support of state-run healthcare isn’t surprising. Many insurance executives consider health insurance a money-loser that they’d just as soon be rid of to concentrate on more profitable lines such as auto, homeowners’, and exotic life coverages.
Berkshire Hathaway owns the auto insurance giant GEICO and specialty insurers General Re, Central States Indemnity, United States Liability, and others. Through the specialty firms, Buffett has been a player in the market for various types of derivative investments. Not good. The investment rating agency the Fitch Group says that it “views [Berkshire Hathaway]’s potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the ‘AAA’ level.” Those “exposures” include Berkshire Hathaway’s equity holdings in insurance companies as well as its investment in derivative contracts tied to equity and credit markets. Fitch lowered Buffett’s credit rating to AA+.
What would Benjamin Graham say? Would a value investor have gotten involved in derivatives? Buffett argues unconvincingly that investors should distinguish between his use of derivatives and those that made banks “almost impossible for investors to understand.” His use of derivatives hedged his insurance companies against economic volatility. Of course, that’s what the guys at Bear Stearns said.
In September of last year, Berkshire Hathaway started boosting its investment in banks, which include holdings in Bank of America, Wells Fargo, and US Bancorp. It also bought $5 billion worth of preferred shares in the investment bank Goldman Sachs. Preferred shares, as Buffett uses them, are really something like a payday loan for companies that are in trouble. They’re good business, but they’re not value investing.
In the wake of his Goldman Sachs investment, Buffett told CNBC: “If I didn’t think the government was going to act, I would not be doing anything this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly.”
That’s definitely not value investing.
Berkshire Hathaway has been a major beneficiary of federal bailout money. By some reckoning, it’s among the top five recipients of TARP assistance; Buffett has had a direct interest in the government actions he’s advocated over the past nine months. So, next time you read that the Sage of Omaha favors single-payer health coverage, don’t mistake that for altruism. Or anything other than corporate statism.