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. Last Updated: 07/27/2016

Buffett Company Considers Buying Its Own Shares




NEW YORK -- Warren Buffett is not particularly enamored of the stocks that Berkshire Hathaway owns, even though they have declined substantially in price. But he has found a stock he thinks is cheap - one that Berkshire may begin buying soon: Berkshire Hathaway's own shares.


Last year was a dreadful one for Berkshire. Its major 1998 acquisition, General Re, had poor results and many of the stocks in the portfolio that brought fame and wealth to Buffett, the Berkshire chairman and chief executive, lost value even while the overall market was rising. Overall, Berkshire reported profits of $1.56 billion, or $1,025 a share, in 1999, down from $2.83 billion, or $2,262 a share a year earlier.


Berkshire's Class A stock fell during the year for the first time since 1990, and it has continued to fall this year, closing Friday at $41,300, less than half the $84,000 peak it reached in June 1998.


In a letter to shareholders in Berkshire's annual report, released over the weekend, Buffett again warned that stock prices are generally high, reflecting investors' "wildly optimistic" expectations. As for the companies in which Berkshire has large positions, "the prices of the fine businesses we already own are just not that attractive," he wrote. "That's why we haven't added to our present holdings."


Berkshire has never bought back any of its own shares, and Buffett said he thinks share repurchases are often done by companies interested in pumping up the price of their shares even though they are already overvalued.


But Buffett said when the share price fell below $45,000 in February, he considered making purchases, but decided against doing so until shareholders could be told of the possibility. The February plunge came on rumors regarding Buffett's health. The price soon recovered when those rumors were denied, but in recent days it has begun falling again.


By setting a price below which he deems the shares attractive, Buffett may have provided some support for the stock even if the company does not make purchases. "I view it as an IQ test for investors," said Alice Shroeder, an analyst for PaineWebber. "If Warren Buffett is a buyer, would you be a buyer or a seller?"


That comment reflects Buffett's legendary status as an investor. It is a reputation that has made Berkshire's annual meeting something of a pilgrimage for thousands of investors.


But Buffett's recent performance as a money manager leaves something to be desired, as he wrote in his letter to shareholders. Buffett has long measured his performance against the Standard & Poor's 500 index. It gained 19.5 percent last year, not including dividends, while Berkshire's book value, largely reflecting the value of the investments, rose just 0.5 percent.


"We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well," Buffett wrote in the company's annual report, released Saturday. "Even Inspector Clouseau could find the guilty party: your chairman."


Overall, Berkshire Hathaway remains very much an "old economy" company. Its major business is insurance, as the owner of a number of companies including Geico, an auto insurer that has been gaining market share and in the process making life harder for other insurers with higher cost structures. In 1998, Berkshire Hathaway bought General Re, which suffered an underwriting loss of $1.2 billion last year. Buffett blamed industry conditions, but said there were signs that pricing of reinsurance policies was starting to rise.


Buffett said the company's other operations generally performed well, with the exception of its shoe business. As the owner of Dexter and H.H. Brown, Berkshire is now the largest shoe manufacturer in the country - a dubious distinction given the decline of that industry.