'Berkshire bear' fails to sway Buffett on investment strategies

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Posted: Saturday, May 4, 2013 12:00 am

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The money manager picked to ask tough questions at the Berkshire Hathaway annual meeting didn't persuade Warren Buffett to sell his shares, the Berkshire CEO said Saturday during the question-and-answer session.

Douglas Kass, the “Berkshire bear” who is betting on the Omaha-based company's stock decline, said that recent takeovers of “pricier and more mature businesses” including H.J. Heinz Co. could result in lower returns. Buffett, 82, replied that he was confident about the acquisitions, saying Berkshire's growth into a $267 billion company has affected strategy.

“We've paid up for good businesses more than we would have 30 or 40 years ago,” Buffett said. “Paying up for an extraordinary business is not a mistake.”

Buffett's view on the best route to building shareholder value changed as his company's market value and cash hoard ballooned over more than four decades.

The firm, which said Friday it had a record $49.1 billion in cash, spent much of last year's earnings on a $12.1 billion investment in ketchup maker Heinz.

Kass, founder of Palm Beach, Fla.-based Seabreeze Partners Management, answered Buffett's call to change the panel at this year's meeting by adding an investment professional who's a “bear” on Berkshire.

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Berkshire and 3G Capital reached a deal in February valued at about $23.3 billion to buy Heinz, agreeing to pay 20 percent more than the closing price before the transaction was announced. Buffett said Saturday that he invested with 3G because of his faith in the buyout firm led by Jorge Paulo Lemann.

Takeovers, including Buffett's biggest acquisition, BNSF Railway, contrast with his earlier approach. In a 1978 letter to investors, Buffett said that “truly outstanding businesses” often sold in equity markets at a discount compared with the cost of negotiating to buy entire companies.

Berkshire Class A shares have climbed 22 percent this year to $162,904, beating the 13 percent gain in the Standard & Poor's 500 Index.

Berkshire said in December that it bought about $1.2 billion of its stock from the estate of a longtime shareholder and boosted the price it's willing to pay in the future for repurchases, signaling that Buffett viewed the stock as undervalued.

“You haven't convinced me to sell the stock yet, Doug,” Buffett told Kass on Saturday.

Berkshire will outperform other “giants of the past” because it has a better management system in place, Vice Chairman Charlie Munger said.

Kass questioned whether Berkshire would suffer after Buffett's eventual departure. He said Buffett's reputation helped win deals with companies seeking to restore market confidence.

Buffett said his successor will have access to even more capital as Berkshire grows.

In times of turbulence, Berkshire's leader will have the chance to make investments on favorable terms, he said.

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