Buffett's IAG foray a message to market

IAG has won the backing of the world's most astute investor. Photo / Getty Images

Last week the world's greatest living investor and third richest person made his first foray into the Australian stock market with a A$500 million stake in insurer IAG.

As is always the case when Warren Buffett makes a new investment, people took notice.

Shares in the insurance group quickly jumped 4 per cent; the investment was widely hailed as a vote of confidence in IAG and in Australia generally.

Whatever the market serves up, Warren Buffett keeps his eye on the long game. Picture / Getty Images

But Buffett's latest foray is also a prod to the market about its focus on short-term returns, sometimes at the expense of larger long-term gains.

Under the deal, IAG is issuing Buffett's investment conglomerate Berkshire Hathaway with A$500 million ($563 million) worth of shares for a 3.7 per cent stake in the company. Berkshire Hathaway will also receive 20 per cent of IAG's insurance premium revenue and cover a fifth of the insurance customers' claims in exchange for an undisclosed fee.

For Berkshire Hathaway, the deal means a fast track into Asia, where IAG is strong, as well as the premium income.

For IAG, the deal provides A$500 million in cash and lowers capital reserves it has to hold by A$700 million because Berkshire Hathaway has taken responsibility for a chunk of its premiums.

IAG can use the freed up funds to further its Asian growth ambitions or return them to shareholders.

And by having Berkshire Hathaway pay some of its insurance claims the deal will help smooth out IAG's earnings.

Buffett has committed to the deal for the next decade, but envisages the investment will be much longer term.

"Even though this contract only runs for 10 years, I expect for decades and decades and decades we will both benefit from this," Buffett said from his hometown of Omaha, Nebraska after the deal was announced.

"I am 84 years old and this is my first investment in an Australian company - I have been very derelict, but it has been worth waiting for."

This type of long-term horizon has transformed Berkshire Hathaway, once a shirt manufacturer, into an investment conglomerate worth US$350 billion ($508 billion) and earned Buffett a net worth of US$58 billion.

This success has thousands of people making the pilgrimage to Buffett's headquarters every May to hear the latest homespun folksy investment advice during the "Oracle of Omaha's" reports to investors.

Buffett signalled he's prepared to overlook any short-term ups and downs in the Australian market as he pursues other investments there.

"I am bullish on most sections of the world. I am bullish on America and I am bullish on Australia. I don't know what's going to happen next year but I know what is going to happen over the next 10, 20 or 30 years," he said.

Contrast this with some of the local reaction to the IAG deal. Analysts focused on the dilutive impact of handing over 20 per cent of premium income, reducing the amount IAG earned per share.

Maybe so, but they're missing the bigger opportunity here. In Buffett, IAG has won the backing of the world's most astute investor and in Berkshire Hathaway it has access to an insurer of vast expertise and resources in the insurance sector.

Over the long term, this is undoubtedly great news for IAG and anyone who invests in it.

Fundies and analysts have a tough job, only the brave stand out from the pack and overlook the short term. There's little consolation for them in being right in the long run - by then they will have lost their jobs.

If Buffett can invest with a time-frame of a decade or more when he's into his ninth decade, the rest of us don't have much of an excuse for short termism.

We would all do well to heed his words of wisdom: "I advise people in the United States and all my friends: just put your money in equities and forget about it for 20 years."

Muddy waters New Zealanders know Ralph Waters as the former chief executive of Fletcher Building, who massively grew the building materials company's profits, with a resulting boost to the share price.

He hasn't had such luck at Woolworths.

As chairman of Australia's largest retailer, Waters has overseen a

failed attempt by chief executive Grant O'Brien to arrest a sales

decline, two profit downgrades in the past four months and a sliding share price.

O'Brien fell on his sword last week, saying the company would be better led by someone else.

For his part, Waters says he isn't going anywhere and will lead the search for a new CEO. "The stability of the board through this process is paramount," he said.

But institutional shareholders are unhappy with the board, and Waters should consider himself on notice.

If he and his new CEO can't quickly present the market with a credible turnaround strategy that arrests Woolworths' market share decline, his days with the company will be numbered.