Buffett Concerned About Inflation

Warren Buffett is in Toronto as part of his world tour, trying to look for companies to buy.

What makes people want to sell their companies to Berkshire Hathaway?

The Berkshire Hathaway Inc. CEO replies that he tells a prospective seller to think of the company as a work of art.

You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever, or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.

Buffett, 77, can afford to throw a little mud on his competitors in the private-equity industry. Wall Street's acquisition machine has seized up, while Buffett, in the valedictory chapter of a much-envied career stretching back more than 60 years, is on a buying spree.

He has $35.6 billion in cash to spend, and he's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts and that sell products with strong market positions or other competitive advantages.

That he is doing so in one of the worst economies in memory makes his wheeling and dealing all the more amazing. But that has been Buffett's style, although he took time last week to express his concerns about the country's financial well-being.

He has been saying for months that he thinks the U.S. economy is in a recession, and now he says inflation should be a worry.

Buffett told CNBC in a live interview that all the data he sees from Berkshire Hathaway subsidiaries, which include home furnisher RC Willey and Rocky Mountain Power in Utah, shows the economy weakening.

Everything connected with construction and with consumer, I see weakness, and if anything, it's accentuating a little bit.

Buffett also said he thinks inflation is picking up, especially in steel and oil.

His concerns aside, Buffett is poised to make more strategic acquisitions. His biggest catch so far in 2008 was Marmon Holdings Inc., a conglomerate owned by Chicago's Pritzker family. In March, Berkshire bought a 60 percent stake for $4.5 billion.

In April, he agreed to pay $2.1 billion for an undisclosed stake in Chicago's Wm. Wrigley Jr. Co. as part of Mars Inc.'s $23 billion purchase of the gum maker. Buffett, who already owns See's Candies, is helping to fund the deal with $4.4 billion in subordinated debt.

"This is the kind of market where you would expect the pace of Berkshire acquisitions to pick up," says Keith Trauner, senior analyst of Fairholme Capital Management LLC in Short Hills, N. J. "In a weaker business environment, sellers moderate their expectations."

The Sage of Omaha, by his own count, owns 76 companies outright, a number that rises to about 200 if Marmon's 125 subsidiaries, which make everything from water treatment gear to brake drums, are taken into account.

Among the Buffett companies are names familiar to most Americans - Geico car insurance, Dairy Queen restaurants, Benjamin Moore paints and Fruit of the Loom underwear.

Berkshire also owns 8.6 percent of Coca-Cola Co., 13.1 percent of American Express Co., 36 percent of Anheuser-Busch and 8.8 percent of Wells Fargo & Co. Those three investments alone amount to nearly $25 billion.

Buffett's investment choices have yielded a conglomerate that's profitable in all kinds of weather. Through May, Berkshire's Class A stock, which traded last week in the range of $122,700 a share, has returned an average of 19.3 percent annualized
in the past 20 years, nearly double the 11.2 percent return of the S&P 500 Index. From June 2007 through last week, Berkshire stock rose 12.1 percent, while the S&P 500 returned a negative 10.8 percent.

As of Feb. 29, Buffett owned 28.1 percent of the combined value of Berkshire's Class A and B shares, worth $53.44 billion.

Still, Berkshire's growth is slowing. The annual median increase in per share book value, or net worth, averaged 10.3 percent in the eight years ended on Dec. 31, 2007, compared with 26.1 percent in the 1990s and 28.8 percent in the '80s

"Anyone who thinks we will come close to repeating our past performance should sell their stock," Buffett told investors at Berkshire Hathaway's annual meeting in May, attended by 31,000 investors. Not many are likely to take that advice.