Buffett Scales Back Stock Purchases as Berkshire's Cash Holdings Dwindle http://www.bloomberg.com/apps/news?pid=20601087&sid=a8n6G_jyhYkI&refer=home Buffettâs Berkshire Scales Back Stock Purchases as Cash Erodes Share | Email | Print | A A A By Erik Holm May 19 (Bloomberg) -- Warren Buffettâs Berkshire Hathaway Inc., the largest shareholder in Kraft Foods Inc. and Coca-Cola Co., is scaling back stock purchases after the firmâs cash holdings fell to their lowest in more than five years. Berkshire is spending less as the firm comes closer to the $10 billion that Buffett says is the minimum he wants on hand to protect against calamity. The cash hoard, which had been at $47.1 billion in September 2007, fell below $20 billion in April after the company posted its worst loss in at least 20 years and Buffett directed funds to corporate debt and preferred stock. âHeâs tapped out,â said Jeff Matthews, author of âPilgrimage to Warren Buffettâs Omahaâ and founder of hedge fund Ram Partners LP. âHe had to sell some of his stocks to buy stuff last fall. Thatâs why heâs not been making big stock purchases.â Berkshire spent $624 million on equities including Wells Fargo & Co. in the first quarter, the smallest amount since at least 2005, according to regulatory filings by the Omaha, Nebraska-based company. Buffett is instead locking in returns of 10 percent or more by investing in preferred shares of Goldman Sachs Group Inc. and General Electric Co. and buying similar securities sold by Swiss Reinsurance Co. Heâs also purchased debt in companies including candy manufacturer Mars Inc. and wallboard maker USG Corp. Such deals since September collectively pay interest of more than $1.8 billion annually. âBerkshire, basically, every month generates cash,â Buffett said at a press conference May 3, the day after the annual shareholder meeting in Omaha. âWe have not been buying a lot of equities.â Locking in Returns The Goldman Sachs and GE investments also give Buffett the option to buy stock at prices set when the deals were consummated. The Swiss Re and USG purchases are among those that may convert to stock later. âHow can you turn something like that down,â said Gerald Martin, a finance professor at American Universityâs Kogod School of Business in Washington who has studied Buffettâs investing history. âHeâs hedging in the right way. Heâs buying these things in a period of uncertainty and locking in the return until the stocks recover.â Berkshire spent an average $2.9 billion on stocks per quarter in the 16 periods ended Dec. 31. The only time in that span when Berkshire invested less than $1 billion was the fourth quarter of last year, when the firm paid $691 million for equities and sold shares of companies including Procter & Gamble Co., Johnson & Johnson and ConocoPhillips for $4.77 billion. Higher Threshold Buffett told shareholders in February that he sold the three stocks -- which he âwould have preferred to keepâ -- to fund the investments in Goldman Sachs and GE. Berkshire had almost $20 billion in cash after buying preferred shares in Dow Chemical Co. in April to help the company acquire Rohm & Haas Co., Buffett said this month. âFrankly, when we had $45 billion around, the threshold wasnât as high for the first deal,â Buffett said in a Bloomberg Television interview in March. âThe threshold has to be higher now.â Buffett said this month that Berkshire was also scaling back on property insurance coverage because of cash limitations. Berkshire typically gets about half its profit from insurance operations, protecting clients against disasters including hurricanes. âWe donât have as much excess capital as we had a couple years ago, so we cut back somewhat on the insurance risk we take,â he said at the press conference. Berkshire posted profit declines every quarter in 2008 and then a $1.53 billion deficit in the first quarter as the company sold ConocoPhillips shares at a loss and paid $675 million on derivatives tied to indexes of corporate bonds. Equity Puts Derivative linked to equity markets weighed on Berkshireâs results last year. The contracts commit Berkshire to pay out on dates beginning in 2019 if specified stock indexes in U.S., Asia and Europe are lower than they were when the bets were made. Buffett, 78, sold some of the derivatives near the marketâs peak in 2006 and 2007, and liabilities on the contracts widened to $10.2 billion as of March 31. Berkshireâs stock has dropped 25 percent in the past 12 months through yesterday. Buffett didnât respond to a request for comment left with assistant Carrie Kizer. Some of the largest equity holdings in Berkshireâs U.S. portfolio, valued at $40.9 billion as of March 31, have plunged in the past year. American Express Co. dropped 46 percent, ConocoPhillips slumped 51 percent and Burlington Northern Santa Fe Corp. has fallen 37 percent. U.S. Bancorp Buffett, named the worldâs second-richest person by Forbes magazine, makes most of the investment decisions at Berkshire, while Lou Simpson, 72, manages the portfolio for car-insurance unit Geico Corp. Buffett has cautioned against assuming all moves in the equity portfolio are his. Buffettâs firm, the largest shareholder in San Francisco- based Wells Fargo, increased its stake in the bank by about 4.3 percent in the first quarter to 302.6 million shares, and boosted holding of Minneapolis-based U.S. Bancorp by about 2.2 percent. Berkshire also bought back shares in Johnson & Johnson, the worldâs largest maker of health-care products. To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net. Last Updated: May 19, 2009 00:01 EDT