Warren Buffett loaned about $300 million to Harley-Davidson during the financial crisis.
The motorcycle maker needed cash in the face of softer demand and liquidity drying up.
Buffett made about $150 million in five years, but could have raked in $1 billion owning the stock.
Warren Buffett’s luck changed this year, allowing him to spend a record sum on stocks and end his deal drought. Here are his 6 highlights of 2022.
Warren Buffett spent a record sum on stocks and made a major acquisition in 2022.
The Berkshire Hathaway CEO tore into bitcoin, adjusted some overseas bets, and gave a surprise gift.
Here are the investing icon’s 6 highlights of 2022.
Warren Buffett’s luck changed in 2022. After years of battling to find bargains and watching Berkshire Hathaway‘s cash stack up, the famed investor seized his chance to put his conglomerate’s mountain of money to work.
Buffett spent a record sum on stocks, executed a major acquisition, and made some striking changes to his overseas bets. He also crowed about four of Berkshire’s key holdings in his yearly letter, trashed bitcoin at the annual shareholders’ meeting, and made a surprise donation to his children’s charities.
Here are Buffett’s 6 highlights from 2022:
The annual letter
Buffett published his famous annual letter to Berkshire shareholders in February.
The investor vented his frustration with Berkshire’s mammoth $144 billion cash pile, blaming a lack of bargains in the stock market. He also celebrated the “Four Giants” among Berkshire’s businesses: insurance, railroads, energy, and its enormous Apple stake.
Moreover, Buffett appeared to respond to criticism of his tax practices by noting Berkshire paid $3.3 billion of federal income tax in 2021 — nearly 1% of all the corporate income taxes collected by the US government that year.
Buffett struck a deal to buy Alleghany for nearly $12 billion in March. Berkshire completed its takeover of the insurer in October, ending a years-long drought on the acquisition front.
The investor showcased his trademark approach to dealmaking, which prizes trust and simplicity. He proposed the merger over dinner with Alleghany’s CEO, who previously ran a Berkshire subsidiary, and the pair formally announced a deal less than two weeks later.
Buffet also refused to budge on the deal terms, and when Alleghany enlisted Goldman Sachs as a financial advisor, he insisted the investment bank’s fee was subtracted from Berkshire’s offer price.
An epic buying spree
Berkshire plowed a net $41 billion into stocks in the first quarter of 2022, setting a new record for its quarterly spending on equities.
Buffett and his team built large stakes in HP, Chevron, Occidental Petroleum, Citigroup, Paramount, and Taiwan Semiconductor in the first nine months of 2022. Berkshire also spent over $5 billion on buybacks and made other sizeable purchases, lifting its spending on stocks and acquisitions for the year to an astounding $70 billion or so.
The annual meeting
Buffett hosted Berkshire’s annual shareholder meeting in his hometown of Omaha, Nebraska in April, after two years of virtual gatherings due to the pandemic.
The investor called out the reckless speculation in the stock market, underlined the grave threat posed by inflation, and declared he wouldn’t pay $25 for all the bitcoin in the world.
Buffett made some big moves in 2022 that deserve special attention. For example, he poured a total of about $30 billion into Chevron and Occidental, propelling the pair of oil-and-gas companies onto the list of Berkshire’s most-valuable holdings.
The investor and his team also revealed in November they had boosted their billion-dollar bets on Japan’s five largest trading houses.
In contrast, they sold BYD shares for the first time in 14 years. Berkshire has now slashed its position in the Chinese electric-vehicle maker by around 22%, and pocketed an estimated $1.2 billion profit from the disposals.
An unexpected gift
Buffett made his usual annual donation of Berkshire stock in June, dividing the $4 billion gift between the Bill & Melinda Gates Foundation and four of his family’s charities.
Unexpectedly, he contributed a further $759 million worth of Berkshire stock to his three children’s foundations for Thanksgiving, saying he was proud of their charitable work and wanted to show his appreciation.
7/7 SLIDES
Warren Buffett loaned just over $300 million to Harley-Davidson in February 2009, when the storied motorcycle maker was reeling from a one-two punch of weaker demand and a cash crunch during the financial crisis.
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A few weeks earlier, Harley-Davidson had unveiled a three-part plan to weather the downturn. It centered on investing in its brand, cutting expenses, and finding the money to cover its financing division’s roughly $1 billion in yearly costs.
The first two elements translated into targeting younger and more diverse riders; closing plants, combining operations, and outsourcing some distribution; and laying off about 1,100 employees or about 12% of its workforce.
However, paralyzed credit markets made it tricky to fulfill the third part of the plan. The company ultimately decided to borrow from its largest shareholder, Davis Selected Advisers, as well as Buffett’s Berkshire Hathaway.
“It was the bridge we needed to get us through a rough time,” Harley-Davidson’s finance chief, John Olin, told Fortune in 2014.
The manufacturer needed the cash to continue offering financing to motorcycle dealerships and retail customers, and to keep its production lines rolling, Olin continued.
The high-interest loan was its only option to borrow money without giving up a stake in the company, he added.
“Credit remained virtually nonexistent,” Alice Schroeder said about that period in “The Snowball: Warren Buffett and the Business of Life.”
Schroeder added: “Buffett lent at interest rates that in some instances bordered on usurious.”
The famed investor also displayed his ruthlessness when he refused Harley-Davidson’s request to repay its loan early. Berkshire said it was happy with the agreed terms, the company told Fortune.
Buffett likely netted a solid $150 million in profit from the loan. Yet he could have raked in over $1 billion by investing $300 million in Harley-Davidson stock instead, as its shares more than quadrupled in value between 2009 and 2014.
“I knew enough to lend them money; I didn’t know enough to buy the equity,” the investor replied.
“I kind of like a business where your customers tattoo your name on their chest,” he continued. “But figuring out the economic value of that … I’m not sure even going out and questioning those guys I’d learn much from them.”
Buffett added that he made the loan because he felt confident at the time that “a) Harley-Davidson was not going out of business, and that b) 15% was going to look pretty damned attractive.”
Keeping it simple
Berkshire made “very good money” by simply determining Harley-Davidson wouldn’t go broke and lending it some much-needed cash, Buffett said at the meeting.
Buying its stock would have posed tougher questions such as whether the motorcycle market would shrink or the company’s margins would suffer from the economic downturn, he added.
The Harley-Davidson loan and other crisis-era deals showcased how Berkshire’s policy of keeping some cash in the bank and never going all in on stocks can pay off handsomely, Buffett noted.
“We felt very good about where that philosophy left us,” he said. “We actually could do things at a time when most people were paralyzed, and we’ll keep running it that way.”
