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Buffett’s Berkshire Bets on Global Stock Market

From Bloomberg News

Warren E. Buffett, struggling to find acquisitions big enough to boost Berkshire Hathaway Inc.'s returns, is making a $14-billion bet on the global stock market.

Berkshire sold a form of insurance to buyers who wanted protection from a drop in “four major equity indexes” over the next 15 to 20 years, according to a Securities and Exchange Commission filing. Instead of buying the individual shares, Buffett is wagering the indexes, three of which are outside the U.S., won’t tumble and force Omaha-based Berkshire to pay a claim.

The “long-duration equity index put contracts” are among the largest transactions Berkshire has disclosed, and they represent the kind of risk that Buffett, the company’s chief executive, and Vice Chairman Charles Munger are turning to more often as undervalued companies get harder to find. Buffett calls such investments, including stakes in oil derivatives, silver and zero-coupon bonds, “unconventional.”

“They figured out a very interesting strategy that basically nobody else can do because of their size and long-duration capital,” said David Winters, who manages $400 million at Wintergreen Advisers and has held Berkshire stock for his own account for more than a decade. “Buffett and Munger have made the ultimate contrarian play here. They take a premium in today, and they’re willing to buy securities if markets really plunge.”

Buffett has become the world’s second-richest person largely by buying stocks that he considered undervalued, such as Coca-Cola Co., Wells Fargo & Co. and American Express Co., and holding them for years.

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The stock-index contracts, derivatives that function like put options, increase Berkshire’s risks from market losses. A 30% decline in each of the indexes last year would have led to a $900-million pretax loss for the company, according to the March 7 SEC filing. Berkshire’s “maximum exposure” was about $14 billion at the end of last year, the filing said.

The company did not name the stock indexes involved or disclose other details of the contracts.


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