I don’t feel so bad about my past year investing. After all, even the world’s most famed investor – Warren Buffet – had his wings clipped today. Bloomberg reported that rating agency Moodys cut his company Berkshire Hathaway’s top-level Aaa credit rating by two levels to Aa2, on the falling value of stock markets and the impact of the recession on corporate profits. Last year was the worst for Berkshire since Buffett took over in 1965, as the company had massive losses on derivative bets tied to stock markets and corporate bonds.
Berkshire, which is essentially a conglomerate of companies, suffered mainly because of the write downs it’s various financial/insurance companies had to take and uncertainty over future cash flows. While Buffet played down the credit rating downgrade, it is has been one of the most coveted features of the company and the loss of it will surely not sit well with the Oracle of Omaha. The rating downgrade, with more to come from the other agencies, has probably already been factored into the current stock price that hardly moved today. Some analysts are even saying it is a bargain at $88,000 (40% below the $147,000 high last year), with hedge fund manager, value investor, and Warren Buffett fan Whitney Tilson telling CNBC Moody’s downgrade will have no effect on Berkshire’s holdings, and only a very small potential impact on its earnings. It may face slightly higher borrowing costs, but Tilson notes that Berkshire has lots of cash and doesn’t do much borrowing. He also points out that Berkshire’s derivatives positions don’t require the company to put up additional collateral in the wake of a ratings downgrade.
Tilson calls it “ludicrous” that Berkshire and General Electric (GE) now have the same credit rating from Moody’s when Berkshire has roughly 10 times GE’s tangible book value. He says the inconsistency “underscores why no sane investor should pay any attention to the credit rating agencies.” In his view, they are “thoroughly discredited” at this point
Warren Buffett is arguably America’s most-followed investor and despite the current misfortunes of Berkshire he is still one of the world’s richest people. With his continued strategic purchases in America’s blue chip companies and long term focus, it would be a brave soul that bets against him and Berkshire.