Buffett Won’t Sell Japan Shares as Earthquake Creates ‘Buying Opportunity’

Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) has a bullish derivative bet on Japan’s benchmark stock index, said the country’s record earthquake created a buying opportunity for equity investors.

“If I owned Japanese stocks, I would certainly not be selling them because of the events of the past 10 days or so,” said Buffett, speaking to reporters in the South Korean city of Daegu. “Something out of the blue like this, an extraordinary event, really creates a buying opportunity.”

The March 11 quake and tsunami, which caused the worst nuclear disaster in 25 years, may result in losses of $200 billion to $300 billion, with most of the costs uninsured, according to Risk Management Solutions Inc. Japan’s Nikkei 225 Stock Average has declined 12 percent since March 10. Markets in the nation are closed today for a public holiday. The iShares MSCI Japan Index Fund (EWJ), an exchange-traded fund that tracks the country’s stocks, gained 2.6 percent at 1:24 p.m. in New York.

The Nikkei 225 is one of four indexes across the globe whose declines since the 2008 financial crisis have forced Berkshire to post derivative losses on earnings statements. Buffett, 80, sold put options on the indexes and may be required to make cash payments when the contracts begin to mature in 2018. Until then, Berkshire reports mark-to-market gains and losses based on the quarterly performances of the indexes.

Photographer: SeongJoon Cho/Bloomberg

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. Close

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.

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Photographer: SeongJoon Cho/Bloomberg

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.

Mark Mobius, executive chairman of Templeton Asset Management’s Emerging Markets Group, said investors may profit as rebuilding increases purchases of construction materials.

“The demand for cement, steel and raw materials will grow because of the infrastructure spending they will have to do to repair what has been damaged,” Mobius said today in an interview on Bloomberg Television’s “In the Loop” program.

‘Larger the Better’

Buffett canceled a trip to Japan where he was scheduled to visit a factory owned by Iscar Metalworking Cos.’s Tungaloy Corp. in Fukushima prefecture, home to a damaged reactor. Iscar Chairman Eitan Wertheimer, who sold his firm to Buffett, said sales may decline in Japan after Tungaloy halted work at a factory and evacuated most of the 1,400 employees from the local headquarters amid radiation leaks.

“It’ll take some time to rebuild, but it will not change the future of, the economic future of Japan,” said Buffett, Berkshire’s chairman and chief executive officer.

Berkshire would owe $3.8 billion to derivatives counterparties if index prices and foreign exchange rates at maturity were unchanged from the levels of Dec. 31, Buffett said last month in his annual shareholders’ letter. Berkshire received premiums of $4.2 billion at the initiation of the contracts, Buffett said.

South Korea is a “hunting ground” for acquisitions, said Buffett, who prefers larger companies. Berkshire committed more than $35 billion to takeovers in the last two years.

“We’re ready to invest, and basically the bigger the better,” said the billionaire investor. “Large companies appeal to me and Korea has a number of large companies obviously, so it’s a hunting ground.”

Buffett reiterated that he is open to buying non-U.S. companies, while also saying U.S. businesses remain more likely targets. Berkshire invested in TaeguTec Inc. through Iscar, the Tefen, Israel-based toolmaking unit.

‘Pile Up Cash’

“We do pile up cash, month by month, and we’re looking for large businesses to buy,” Buffett said. The U.S. is “the most familiar to me, so it’s most likely where we would do something.”

Buffett is seeking deals in the U.S. and abroad as earnings climb at Omaha, Nebraska-based Berkshire. He agreed this month to pay about $9 billion for engine-additive maker Lubrizol Corp. (LZ) and last year bought railroad Burlington Northern Santa Fe for $26.5 billion. Berkshire’s cash holdings rose to $38.2 billion as of Dec. 31, prompting Buffett to tell investors two months later that his “elephant gun has been reloaded.”

“He can still write a check for $30 billion or $40 billion,” Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner, said after the March 14 announcement of the Lubrizol deal.

Insurance, Ice Cream

Buffett doesn’t pay a dividend or repurchase stock, preferring instead to buy companies and securities with his firm’s profits. In four decades running Berkshire, Buffett has accumulated more than 70 subsidiaries selling products from Geico car insurance to Dairy Queen ice cream and NetJets Inc. flights. The Lubrizol deal, an all-cash transaction, will be completed in the third quarter, the companies said.

Buffett, whose largest non-U.S. acquisition was the 2006 purchase of Iscar, is traveling in South Korea and India to visit Berkshire’s operations and look for opportunities. Iscar was purchased for $4 billion. He visited China in September.

Buffett transformed Berkshire over the last decade by adding shipping businesses and real-estate brokers to the company’s insurance, energy and consumer-goods units. David Sokol, a Berkshire energy executive, said Buffett has the access to capital and confidence to pounce on an opportunity and isn’t limited by devotion to certain industries.

Economic Sense

“Warren’s not the kind of investor to buy something because it fits a plan,” Sokol, chairman of Berkshire’s MidAmerican Energy Holdings, said in an interview in August. “He buys something if it makes economic sense and he believes in the long-term capability of that business.”

Buffett heads a staff of about 20 at Berkshire’s headquarters and delegates operational authority of subsidiaries to the CEOs of each unit. His only instruction to Lubrizol CEO James Hambrick, who will continue running the firm after Berkshire’s takeover, was: “Just keep doing for us what you’ve done so successfully” for investors, Buffett said.

Buffett traveled to Europe in 2008, visiting Germany, Italy, Spain and Switzerland where he touted Berkshire as an attractive buyer for family-run businesses whose managers may want to retain roles with the companies they built. That trip was arranged by Angelo Moratti, an Italian energy executive and Wertheimer.

Berkshire’s growth has prompted Buffett to focus more on businesses such as power producers and railroads, which require consistent investment in infrastructure and equipment. Last year, Berkshire posted $13 billion of net income and spent $6 billion on property and equipment. He has taken at least $2.25 billion in dividends from Burlington Northern since the February 2010 takeover.

Pricing Power

The most important criteria when evaluating a business is pricing power, Buffett told the Financial Crisis Inquiry Commission in May.

“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business,” he said in a recording released by the FCIC in February.

Buffett has said he also focuses on a company’s management and ability to distinguish its products from those of competitors when deciding whether to invest.

Buffett’s investment criteria include companies with “good returns on equity,” little or no debt, “simple” businesses that he can understand, and consistent earnings, he said in Berkshire’s latest annual report. Buffett doesn’t participate in auctions for companies and can tell prospective sellers within five minutes of an offer if he is interested in making a deal, he said in the report.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net; Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Brett Miller at bmiller30@bloomberg.net

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