Biggest isn't best, warns the Sage of Omaha

WARREN Buffett, America's second-richest man and arguably the world's most successful investor, is sceptical about the recent wave of mega mergers between banks and brokers, even though he owns shares in one of the groups affected.

"I think when you get all through with this, you'll find that some of them are real hits and some of them are misses,'' said Berkshire Hathaway's chairman and chief executive. "They're very big and those aren't easy to do.''

Mr Buffett, 67, is famously silent on his investment intentions, apart from the annual meetings of his company in Omaha, Nebraska. His comments ahead of yesterday's meeting came amid a wave of huge deals in recent months, including the $72bn (pounds 43bn) merger of Travelers Group and Citicorp, the $62.5bn marriage of BankAmerica and NationsBank, and the $28.2bn combination of Banc One and First Chicago/NBD, among others.

Mr Buffett, second only to Microsoft's Bill Gates in the US wealth stakes, spoke to reporters before the annual meeting, which drew 10,500 people to his hometown in the MidWest. He gave the interview in Borsheim's, an Omaha jewellery retailer wholly owned by Berkshire. Mr Buffett's 40 per cent stake in Berkshire Hathaway is valued at $33.1bn, based on Friday's closing price of $69,300 a share.

Commenting on the banking mega mergers, he said some of the deals will be unsuccessful, even if they make strategic sense. "There's always execution risk, even for a good idea,'' he said. Berkshire Hathaway owns 23.7 million, or about 2 per cent, of the Travelers shares outstanding.

Mr Buffett wouldn't give his views on specific mergers, though he said Travelers' chairman, Sanford Weill, didn't consult with him before agreeing to the Citicorp merger.

Mr Buffett also aired his thoughts on the silver market. He said that the fundamentals had not changed since his company revealed in February that it had bought about a fifth of the world's known supply of silver.

He declined to say whether the company has sold any silver. Mr Buffett said he did loan a "small'' amount of the metal, but he didn't say how much, when or to whom.

Berkshire Hathaway did sell some of its holdings in McDonald's, the global fast-food chain, last year as part of its efforts to lower the ratio of stocks it held and increase its bond investments.

Mr Buffett didn't say how many McDonald's shares Berkshire Hathaway sold, and said he said he still expects the shares to rise. "We think it's an absolutely first-class company, [though] the fast-food business might be a little tougher than I first thought,'' Mr Buffett said.

"We cut back on about four or five things,'' he said. His shareholder letter indicates Berkshire sold shares of Walt Disney, Federal Home Loan Mortgage and Wells Fargo.

Mr Buffett is famous for being a "value'' investor who seeks to purchase stocks, bonds and whole businesses at a price that is below their intrinsic worth.

His investment in silver was based on the view that demand over the longer term would be greater than the available supply, he said.

"We thought that the figures on production and demand were such that it would require a higher price to establish equilibrium,'' he said.

Mr Buffett reiterated his view that the American stock market was not overvalued given the level of long-term interest rates and the "extraordinary'' returns on equity produced by US companies.

"If returns on equity stay as they have been the last few years, which have been extraordinary by past standards, and interest rates are here, you can certainly make a case that the market is not overvalued, although I think you would have a hard time saying it was undervalued.

"Neither one of those is a given. On returns on equity, that is an assumption where the burden of proof would be in the other direction. I don't think it's the way to bet.

"You need these high returns on equity to justify present prices. Charlie [Munger, Berkshire's vice chairman] and I have been surprised by the fact that they have been achieved. Whether they can be sustained over a 10 or 15-year period, there's real questions on that.''

Berkshire Hathaway shares have risen by 51 per cent this year, compared with the New York Stock Exchange Composite Index, which has risen 15 per cent. Berkshire also owns businesses outright, including motor insurer Geico and Dexter Shoes.

Berkshire's surge comes at a time when Mr Buffett has complained consistently that he can't find cheap stocks or businesses to buy that meet his standards. Instead, he's turned to "unconventional commitments'' like silver and zero-coupon Treasury bonds.

When asked whether international stocks are more attractive because of the high valuations on US stocks, he replied: "We've always looked internationally. We haven't found a lot, but anything that we think we can understand and where we think we can get a lot for our money, we're willing to do. We've done that over the years; not every one of those moves has been apparent to people.

"It's rare that we find something away from our natural hunting ground, but it isn't because we don't look beyond our natural hunting ground. We still try to look at things we think we can understand. Geography doesn't define what we can understand. The nature of the business is much more likely to define it.''

Mr Buffett was also asked about his decision to invest in De Beers Centenary, the South African company that is the world's largest diamond producer. Mr Buffett said: "I probably got my first annual report from De Beers in 1952 or 1953. So I've got 40-some years of their reports and we haven't bought any, but we went 30 years between silver purchases too.

"A lot of the time it's obviously been a worry about the political situation. The hold that De Beers has on the diamond market is probably less secure now than it was 30 years ago.''

- Bloomberg