World’s greatest investor eyes Swiss Re

There is no better way to gain experience in a particular field than to watch an expert in action. In the world of stock market investing, that guru is none other than Warren Buffett. Dubbed the ‘Sage of Omaha’ Buffett’s investing skills have elevated him

Buffett has a great eye for value

Buffett is a master of the art of value investing. He studies balance sheets and income statements to find companies where shares are trading at a large discount to real value. The higher a market climbs, the more difficult it becomes to find such value opportunities. And that has been Buffett’s problem in recent years.

There have been few complaints though; because the value investing strategy has rewarded Berkshire Hathaway shareholders handsomely. Major acquisitions over the years include stakes in American Express, The Coca Cola Company, Gillette, The Washington Post and Wells Fargo to name a few. More recently global market turmoil has knocked share prices back into Buffett’s buying zone, giving him the opportunity to spend almost $6bn on new acquisitions in the last month alone.

These purchases include a 5% stake in Kraft Foods (a major US food and beverage producer), 3% of Dow Jones & Co (a US publishing company) and a pending $4.5bn bid for 60% of US holding company Marmon. But we are most interested in his first purchase of 2008 – a 3% stake in global reinsurer Swiss Re.

Fancy a slice of Swiss Re?

When Buffett makes up his mind about a share he acts quickly and decisively. Berkshire Hathaway recently announced it had acquired a 3% stake in Swiss Re on the open market. Analysts estimate that the purchase cost in the region of $750m. The market reacted positively to the news and shares in Swiss Re posted a 4% rise on Wednesday. Berkshire Hathaway already has significant interests in the insurance industry through wholly owned GEICO (primarily a motor vehicle insurer) and Berkshire Re (one of the largest reinsurers in the world) in the US. And this has prompted speculation that the 3% slice of Swiss Re is only the beginning.

Buffett is viewed as the ‘go to’ man when things get tough in the industry. The Financial Times reports that after Hurricane Katrina, many companies turned to Buffet when certain types of hurricane risk insurance were hard to come by. And in the midst of the US sub-prime debacle the New York insurance superintendent convinced Buffett to establish a bond insurance company to prop up the ailing industry. Although happy to oblige, Buffett’s motivation remains securing capital growth and long-term returns for Berkshire’s shareholders.

It therefore came as no surprise to learn that the purchase of 3% of Swiss Re had a sweetener attached. For Buffett this sweetener is in the form of premium income. His group will receive 20% of Swiss Re’s property and casualty premiums for the next five years in return for taking on some of Swiss Re’s risk. Analysts feel this period is too long; but they forget that Buffett views a share purchase as a long-term relationship. After all, Buffett is on record saying that Berkshire’s “favourite holding period is forever.”

Meanwhile, South African insurance stocks tumble

Would Buffett be buying some of our insurance companies at the moment? Locally listed life assurance companies started the year deep in negative territory. Old Mutual, which started the year at 2291cps fell 20.51% to close at 1821cps on 23 January. Liberty Life was down 13.76% and Sanlam 14.50% over the same period.

We think at these levels the astute value investors would certainly show some interest. But the threat of further market contagion as the US nears recession might keep such investors on the back benches for the next few months.

Editor’s thoughts: The current global investment outlook is a great deal gloomier than in the preceding five years. The only blessing is that falling markets give investors opportunities to buy solid companies at grossly discounted prices. Are you prepared to step into the market at current levels – or would you prefer to wait and see how bad the sell-off gets before committing? Add your comment at the end of this article, or send it to gareth@fanews.co.za