Warren Buffett Is Dumping Stocks out the Backdoor

Maybe Warren Buffet’s impeccable sense of timing kicked in. Or maybe he got shook up a little when IBM reported another revenue and earnings debacle in October, and in the subsequent swoon of its shares, he lost $1.3 billion. Followed a day later by a $1 billion hit on his position in Coca-Cola when it reported earnings. And all year, he has been getting hammered on his investment in British grocery chain Tesco which has lost nearly half its value, costing him around $750 million.

All this, even while stock markets have been bouncing around record highs.

“I like buying it as it goes down, and the more it goes down, the more I like to buy,” said the master manipulator during one of his hype interviews on his favorite and always helpful promo platform, CNBC, in early October. And true to form, filings revealed on Friday that he bought a few things here and there, such as increasing his stake in GM, and that he sold a few things too. But those were smallish amounts by his standards.

Meanwhile, he is dumping some of his big, highly profitable positions in publicly traded stocks – but not out the front door.

It was skillfully obscured by the ruckus over the tax aspects of these deals: that one of the richest guys in the world, or rather his company, Berkshire Hathaway, would be able to take advantage of a specially created tax loophole that regular folks don’t have access to, a loophole that would save the company billions in taxes.

Last week, it was Berkshire’s complex acquisition of Procter & Gamble’s Duracell unit. Everyone dutifully fell in line, laid out by Buffett, and called it an “acquisition,” though the other and more important half of the transaction was the sale of a huge position of P&G shares.

A “brilliant move,” explained Doug Kass, president of Seabreeze Partners Management.

Instead of paying cash for Duracell, Berkshire will hand over $4.7 billion in P&G shares that it has owned since 2005 when P&G bought Gillette, in which Berkshire had a major equity stake since 1989. As part of the deal, P&G agreed to infuse $1.8 billion in cash into Duracell. And it’s going to be costly for P&G: it would take a charge of 28 cents per share.

OK, so this deal involves a lot of paper shuffling. But in effect, Berkshire is selling $4.7 billion in P&G shares for which, as Reuters reported, it paid $336 million at the time of its investment in Gillette. Normally, an outright sale with capital gains of this magnitude would have triggered a hefty tax bill. By swapping those shares for Duracell, no taxes are due.

And this “brilliant move” wasn’t the first one: At the end of last year, Berkshire announced that it would sell $1.4 billion of its shares in Phillips 66, not for cash but for that company’s pipeline-services business, Phillips Specialty Products.

In March, Berkshire announced that it would sell $1.1 billion of its shares in former media giant Graham Holdings, formerly known as the Washington Post Company. In return, Berkshire would get paid some cash, a Miami TV station, and about $400 million in Berkshire’s own shares that Graham Holdings owns.

Sound a little circuitous? Berkshire started accumulating these shares in 1973 at a cost of about 1% of the selling price, the Washington Post reported. So it would have had to pay a big chunk in taxes on the capital gains if the sale had been done the way that normal investors have to sell and buy stocks.

By bartering these mega-positions of publicly traded shares for a mix of non-publicly traded assets, Buffett’s company dodged an onslaught of federal income taxes. And that’s what the mainstream media focused on. We’re shocked and appalled. How could he!

But these deals did something more important: they allowed Buffett to dump publicly traded shares that are subject to the stock market’s whims that tend to manifest themselves after long rallies in a most unpleasant manner, either individually, as in Tesco’s case, or jointly during a crash or a long bear market – and dump them out the backdoor without spooking the markets that could hit the rest of his holdings.

He did so with impeccable timing as the stock market has been bouncing to ever more inexplicable highs. In exchange, he picked up shares of companies that aren’t publicly traded. Berkshire would own them outright. No one else would have any impact on their market value because their wouldn’t be a market value. Stocks could go to heck entirely, but with regards to these companies, Buffett wouldn’t care; their “value” on Berkshire’s books wouldn’t change.

These deals are a way of cutting exposure to the stock market. They’re big bearish bets. And the fact that the media reported them as acquisitions and a billion-dollar taxpayer-funded welfare gift ingeniously obfuscated the reality behind them.

Perhaps Buffett saw something spooky: The shares of Phillips that he sold got caught up in the oil price plunge and have dropped 18% since early September. Read…  How Low Can the Price of Oil Plunge?

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  13 comments for “Warren Buffett Is Dumping Stocks out the Backdoor

  1. dc.sunsets says:

    Rearranging deck chairs on the Titanic.
    While avoiding massive tax-robbery is cunning for a massive tax-pillager (Buffett’s benefits from political chicanery are legion), I still note that Berkshire’s “wealth” is largely intangible.
    When 80 years of compound credit inflation comes out of this credit bubble, the biggest losers must be those who own the inflated assets. Uber-wealthy people like Buffett won’t miss a meal, but it is they who own nearly everything and will be axiomatically those who must lose (on paper) the most.
    Sadly, political oligarchs like Buffett won’t suffer much; losing 90% of billions of dollars still leaves one richer than kings of yore, especially when the rest of us will lose the same percentage off a rounding-error level of his wealth.
    I sincerely wish people would buy a clue and realize that the entire system they believe is “free” is simply a massive political plantation on which they labor as chattel.

  2. John says:

    Interesting post, thanks. Does P&G retire the shares? Bullish all around then, except for the “give me hard assets while I dump this questionable equity” motivation.

  3. Julian the Apostate says:

    I catch a whiff of class envy about my fellow Omahan in that last post. Buffett is simply doing what anyone with a brain is doing: trading worthless paper for real things. He didn’t create the death tax- he’s simply made a fortune taking advantage of it. I, for one, am not chattel and I refuse to accept the premise. I WORK FOR A LIVING

    • Wolf Richter says:

      Julian, if you’re seeing “a whiff of class envy” in my post, then I didn’t do a good job writing it.

      What I wanted to point out was that the media focused on the deals as “acquisitions” and as tax benefits…. and that this focus obscured the real purpose – and the more important part of the deals – Buffett’s massive sale of publicly traded stocks.

      My point was that the smartest investor in the world is selling big profitable positions after a huge market run-up, and he’s doing it out the backdoor in order to avoid spooking the markets. With these deals, he’s in effect cutting his exposure to the stock market.

  4. retired says:

    Hey Wolfe,to tell you the truth I’m jealous!
    I wish I could lose 1.3 billion dollars,I wonder how it feels?
    These deals are all rigged & fixed.I said it in the past & I will say it again.Consider the whole world as one huge poker game & all of us small time suckers are dealt hands from a 52 card poker deck.Now pretend that a handful of inside players like Buffett,Soros,Dimon,Blankfein,Bloomberg & the others are getting their cards from a pinochle deck.How can an average investor using analysis & working with cards from a poker deck come up with a winning hand betting against these crooks?He can’t.
    When a big part of the economy is controlled,directly or indirectly, by the government in collusion with the FED. analysis breaks down!Who needs Analysis & investment theories when what is really needed is access to a high level politician or bureaucrat who,for the right price,can make the right judgement call in your favor.Can see to it that the right government subsidized deal falls in your lap! Most of this comes from government funds which is another way of saying taxpayers money.The whole country is bleeding wealth which is being sucked up by the big players in the financial sector.
    The late economist,Herb Stein famously said “If something cannot go on for ever it will stop”.Unless you believe that our economy is a
    perpetual motion machine you will need to agree that it will stop.I believe it will stop in the near future!

  5. RDE says:

    Warren Buffett— the World’s Greatest Investor, able to move major segments of the corporate economy about as if they were mere pawns on a chessboard. Owner of a private line to Presidents regardless of their political label

    If you had give that spare million to Uncle Warren to invest in on November 16, 1980 each share of Berkshire Hathaway stock would have cost you $65,900. At today’s prices your million would now have grown to $3.3 million.

    However if you had bought gold bars at the going November 1980 price of $264.65 per oz your net worth would now be 4.5 million- and that after years of price stagnation induced by central bank manipulation to depress its price.

    World’s Greatest Investor indeed!

    • Orlando says:

      RDE: you (and Wolf) are not even considering the fact that those ‘investments’ like Duracell are now part of Berkshire, so they will affect Berkshire’s bottom line like any other asset. Bottom line will be affected whether or not he ‘kept’ the stocks he dumped. In the Duracell case, Buffet pretty much forced Gillette into that unfortunate acquisition, nearly cratering the company’s (Gillette) shares in the process. When its’ new skeletons in the closet are accreted to the old ones, Berkshire will crater when the market does… hold on to those gold bars!

    • Jon says:

      @RDE – your post is wildly wrong. Leaving aside that November 16, 1980 was a Sunday and the stock wasn’t traded, the price at that time was $410/share vs. about $218,500/share today. At today’s prices your million would have grown to about $530 million.

      • RDE says:

        I tried to recover the (widely erroneous) chart I drew my historical prices from to prove you wrong but failed. I stand corrected, and henceforth will not rely on a single source without double checking it!

  6. Julian the Apostate says:

    Sorry Wolf. I should have been more precise and identified which post I was referring to which was that of D.C. Sunset. Judging from Retired’s comment it seems almost knee jerk to whine about ‘the little guy’ and paint all of these men as victimizers. Soros is a useful idiot, and Buffett fell for the hope and change bilge at first then later like Steve Wynn realized Obama’s motives and tried to advise him from afar. Didn’t work. Let us not forget WHO has the monopoly on FORCE and it ain’t Buffett. He’s the one with the target on his back. It hasn’t quite gotten to the point where Goring laid his Browning on the table with the German steel makers as his argument but its not far off.

  7. Adam Eran says:

    Worth mentioning: Low beta (volatility) stocks outperform high beta stocks in the long run. Most of Buffett’s “wizardry” has been using the leverage he gets cheaply from his insurance companies to buy low beta stocks and magnify their returns. Meanwhile, ordinary money managers haven’t had a source of cheap financing that’s so reliable, and have had to buy stock with higher betas just to show their performance as stock pickers.

    So…like most “wizards,” Buffett has tricks, not necessarily real magic.

  8. Punit S Jain says:

    Not surprising. Everything the guy did is legal. He’s figured it out. We need to also ….

  9. Joe Rivera says:

    I love how when corporations use the tax law to pay as little taxes as possible, they are being “circuitous”.

    When will see the expose’ on how the US Government uses a “circuitous” route to tax the America consumer via corporate taxes?


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