Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Berkshire Hathaway (BRK/A or (BRK/B)
Jim: This company isn't a household name, Mike, but the guy who runs it needs no introduction: Warren Buffett.
Mike: Yes, and let me make a full disclosure.
Jim: You and Warren are pals?
Mike: Not exactly. Back in 1977, Buffett bought an afternoon newspaper in Buffalo, N.Y., then called the Buffalo Evening News ...
Jim: Which Berkshire Hathaway still owns.
Mike: ... and as his first official act he attempted to put the Buffalo morning newspaper out of business. I happened to be working at that paper at the time.
Jim: So you're saying Buffett's largess hasn't rubbed off on you?
Mike: Let's just say that my colleagues and I had a different name for the man everyone else calls the "Oracle of Omaha."
Jim: Uh-huh. Well, for those not totally familiar with the 69-year-old Buffett, he's the renowned stock picker from Nebraska who's one of the nation's richest men. For decades he used Berkshire mainly as a vehicle for making billion-dollar investments in big companies and then held the stocks for years. For patient investors, the payoff was spectacular.
Mike: To put a finer point on it, he's the classic value investor. He looks for companies trading at less than their real value, buys them at a discount and then waits for the rest of the world to discover what he knew all the time. It's a stark contrast to the popular method of investing in growth stocks, which is a bet on a company's prospects with little regard to its current price.
Jim: Buffett's record still boggles the mind. As BusinessWeek noted recently, if you had put $10,000 in Berkshire stock when Buffett took control of the company in 1965, you'd now have $51 million, versus just $500,000 if you'd put it in the bellwether Standard & Poor's 500 index.
Mike: All well and good, but I remind you, Jim, that timing is everything. Because if you had put $10,000 into Berkshire, say, this past March, you'd now have about, uh, $8,000.
Jim: Right, even the mighty Buffett has taken his lumps this year, and we'll get to that in a moment. There's a couple of things we should note first, however.
Mike: That Berkshire isn't just a trading vehicle?
Jim: Exactly. Even though it still owns huge positions in such companies as Gillette, Coca-Cola, American Express and others, it also has for many years owned a variety of operating companies.
Mike: Yeah, the Buffalo News.
Jim: Let it go, Mike. It also owns the Dairy Queen chain, a variety of shoe companies, furniture companies and even See's Candies.
Mike: Not to mention some major insurance companies.
Jim: Right, Berkshire owns the Geico property-and-casualty insurer, as well as a big reinsurance outfit called General Re. It also just announced plans to lead the buyout of utility MidAmerican Energy Holdings Co., Buffett's first foray in the energy industry. Put it all together, and it sounds like quite a machine.
Mike: What else did you want to note?
Jim: That investors can buy either of two classes of Berkshire's stock. For years there was only the Class A stock, which became the most expensive stock in the country because Warren never bothered to split it. So right now it trades around $59,000 a share.
Mike: Right, this is a stock whose daily move is often $400 or $500--which is more than what 90% of stocks trade for, on average.
Jim: But a few years ago some mutual funds started mimicking Berkshire's holdings for investors who wanted to invest much less than 60 grand. That rubbed Warren the wrong way, so he created a new Class B stock that trades for a lot less, around $1,900 a share today.
Mike: And that basically mirrors movements in the Class A shares.
Jim: So, whether we're talking A or B, what has gone wrong with Berkshire this year?
Mike: Mainly that many of Warren's big holdings, like Coke and Gillette, have gone south. I have a fair amount of sympathy for Buffett--not that he needs my sympathy--but he holds a lot of stocks that I've backed in our prior conversations, Jim, and they're not doing well.
Jim: So you're saying that you and Warren Buffett are in the same boat?
Mike: I'll stipulate that his boat is bigger than mine.
Jim: The bottom line is that, since mid-March, Berkshire's stock has tumbled 20%, though it's shown some renewed life lately. We should note, by the by, that Berkshire announced Friday that its operating earnings--those from the businesses it owns--fell in the third quarter from a year earlier, mostly because a couple of ill-tempered hurricanes cost its insurance business. But its investment gains more than made up for that, so overall earnings were up by about 15%. So here we are, Michael: Would you buy into Warren's empire now?