WARREN BUFFETT Quote : Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
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Sunday, May 24, 2009

Berkshire's cash erodes

Berkshire Hathaway pulls back on making large stock purchases after its cash hoard is slashed.

Bloomberg News

Warren Buffett's Berkshire Hathaway, the largest shareholder in Kraft Foods and Coca-Cola Co., is scaling back stock purchases after the firm's cash holdings fell to their lowest in more than five years.

Berkshire is spending less as the firm comes closer to the $10 billion that Buffett says is the minimum he wants on hand to protect against calamity. The cash hoard, which had been at $47.1 billion in September 2007, fell below $20 billion in April after the company posted its worst loss in at least 20 years and Buffett directed funds to corporate debt and preferred stock.

''He's tapped out,'' said Jeff Matthews, author of Pilgrimage to Warren Buffett's Omaha and founder of hedge fund Ram Partners. ``He had to sell some of his stocks to buy stuff last fall. That's why he's not been making big stock purchases.''

Berkshire spent $624 million on equities including Wells Fargo & Co. in the first quarter, the smallest amount since at least 2005, according to regulatory filings by the Omaha, Neb.-based company.

Buffett is instead locking in returns of 10 percent or more by investing in preferred shares of Goldman Sachs Group Inc. and General Electric and buying similar securities sold by Swiss Reinsurance. He has also purchased debt in companies including candy manufacturer Mars Inc. and wallboard maker USG. Such deals since September collectively pay interest of more than $1.8 billion annually.

''Berkshire, basically, every month generates cash,'' Buffett said at a press conference May 3, the day after the annual shareholder meeting in Omaha. ``We have not been buying a lot of equities.''


The Goldman Sachs and GE investments also give Buffett the option to buy stock at prices set when the deals were consummated. The Swiss Re and USG purchases are among those that may convert to stock later.

''How can you turn something like that down,'' said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington who has studied Buffett's investing history. ``He's hedging in the right way. He's buying these things in a period of uncertainty and locking in the return until the stocks recover.''

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