Buffett's a Genius Again

Disciplined investors like Buffett refuse to play when the potential profit isn't high enough. He's got a major advantage over the funds that raised money on Wall Street for buyouts: He doesn't have a hoard of outside investors clamoring for above-market, short-term returns on their money and forcing the managers of these funds to invest in deals, whether profitable or not, rather than keep their money on the sideline.

That discipline will help Buffett and Berkshire Hathaway investors in the long run. But it sure doesn't do much to solve his excessive-cash problem right now.

Adding up the prospects for these three parts of Berkshire Hathaway, I don't see a good reason to hold onto these shares -- up 20% in 2006 -- and wait for a repeat performance in 2007. The operating companies will continue to do well and expand their revenue despite the exposure of companies such as Shaw Industries to the slumping housing market.

But insurance, as Buffett himself reminded shareholders in the company's third-quarter earnings report, is a cyclical business. Attracted by increased premiums, some of the companies that fled the underwriting market in 2006 will re-enter in 2007. At the least, that will restrain premium increases to less than the jump in 2006. And, of course, there's no guarantee that 2007 will turn out to be as free of natural disasters as 2006 has been to date.

Cheap and Getting Cheaper

I'd swallow my worries about the ebbing of big increases in insurance earnings in 2007 -- if the financial environment looked friendlier for Buffett. The Federal Reserve doesn't look likely to raise interest rates in a major way in 2007 or to do much to slow the growth of the money supply. Money, already cheap, might actually get cheaper in the short term, in 2007. Managers of private equity funds with even more money to invest are likely to drive potential returns even lower in their search for deals.