In Brief

Warren Buffett mistake costs his company $900m

Billionaire admits to a 'big mistake' in spending $2bn without consulting business partner

IN A letter to shareholders, Warren Buffett, the billionaire founder of Berkshire Hathaway, has admitted to making a "big mistake" that cost the company almost $900m (£537m). 

Buffett made the admission in his annual letter to Berkshire Hathaway investors, saying he wished he had "never heard" of Energy Future Holdings, after he backed the company without consulting his long-time adviser and vice chairman Charlie Munger.

Buffett said he spent £2bn acquiring debt for a company that now appears to face bankruptcy.

"Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259m. While owning the bonds, we received $837m in cash interest. Overall, therefore, we suffered a pre-tax loss of $873m," Buffett explained.

In a deal forged at the peak of the boom that preceded the financial crisis, Texas energy company (TXU) was bought by several private equity firms including KKR, TPG Capital, and Goldman Sachs' private equity arm for $45 billion, CNN Money reports. TXU was later renamed Energy Future.

Subsequent to the deal, the joint equity owners put up $8bn and borrowed a "massive amount" in addition. Buffett bought just under $2bn of those bonds.

The billionaire admitted that the purchase, which resulted in the pre-tax loss of $873m, was a decision he made alone. "Next time I'll call Charlie," Buffett promised.

The loss comes in a year when Berkshire Hathaway failed to outperform the S&P 500 index for only the tenth time in the company's history. Still, over their lifetime, the shares in Berkshire have done outperformed the S&P, increasing by 693,518 per cent since 1965, compared with 9,841 per cent for the S&P, the Daily Telegraph notes.

Buffett affirmed that "Charlie Munger, Berkshire's vice chairman and my partner, and I believe both Berkshire's book value and intrinsic value will outperform the S&P in years when the market is down or moderately up. We expect to fall short, though, in years when the market is strong – as we did in 2013. We have underperformed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15 per cent."

In spite of the loss, Buffett pointed to a strong performance in the firm's insurance, rail and energy businesses. Berkshire maintains major investment stakes in beverage company Coca-Cola, the banking group Wells Fargo, and business computing firm IBM.

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