Warren Buffett’s Quiet Strategy

In 1998, Warren Buffett found himself in a predicament. He knew that many stocks had become overpriced, including many owned through Berkshire Hathaway. He also knew that selling those stocks would require a substantial tax payment to the U.S. government, and it would be difficult to find other things to purchase that would create more wealth in the long run once you adjusted for the lower pot of money available after taking the tax hit.

Instead, Buffett pulled off one of the most excellently structured deals of his career. Seeing that Berkshire Hathaway was trading at 2x book value, he issued 18% of Berkshire’s stock to purchase the reinsurer General Re. The brilliance of this move is that: (1) Warren Buffett created value out of thin air by transacting away some of his stock during one of the rare times under his helm when it was expensive; and (2) he lowered his stock exposure by getting his hands on Gen Re’s $24.6 billion fixed-income portfolio that owned municipal bonds paying out 6% to 7%.

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