2007: The Year in Warren (The Final Countdown)

Berkshire Hathaway chairman Warren Buffett plays the ukelele at the Fruit of the Loom stand at the Qwest Center in Omaha, Neb., while touring exhibits prior to the annual Berkshire Hathaway shareholders meeting, Saturday, April 30, 2005. (AP Photo/Nati Harnik)
Nati Harnik
Berkshire Hathaway chairman Warren Buffett plays the ukelele at the Fruit of the Loom stand at the Qwest Center in Omaha, Neb., while touring exhibits prior to the annual Berkshire Hathaway shareholders meeting, Saturday, April 30, 2005. (AP Photo/Nati Harnik)

"Don't count out Warren Buffett."

That's how I began my post one week ago as I launched our '2007: The Year in Warren' countdown, going from #10 to #6 of the top 10 trends and events of the year, as covered here on Warren Buffett Watch.

That was before Buffett showed us again why you can't count him out, as he turned what should have been an uneventful holiday week into a whirlwind of activity.

So, slightly delayed, but fortified with new material, here comes the 'final countdown' from #5 all the way to #1.



Warren Buffett placed a big bet on a railroad this year, picking up shares of Burlington Northern in a series of purchases that has Berkshire owning almost a fifth of the freight carrier's outstanding stock, with the possibility of going to 25 percent or more.

It's not a sector-wide bet, in keeping with Buffett's preference to buy with laser-like precision rather than broad sweeps. Even as he was buying Burlington, we learned he was selling shares of two other railroads: Norfolk Southern and Union Pacific.

Burlington fits the classic Buffett model: a well-run, simple-to-understand industrial company that will benefit from the better economic times Buffett knows are coming back sooner or later. The railroad's protection from competitors, who would have to spend a lot of time and money building new tracks, is also a key factor, as it is in many Berkshire investment decisions.




Warren Buffett has said that his favorite holding period is "forever." So, it isn't surprising that there were a lot of questions about why he was slashing Berkshire's stake in PetroChina over the summer and early fall. One obvious explanation: a profit of $3.5 billion on an investment of $500 million made four years before.

But some human-rights groups, who had been urging Buffett and others to divest as a Darfur protest against Chinese business ties with Sudan, thought he might have been listening to them. Even the Wall Street Journal appeared to be leaning toward that explanation.

But when he was asked by FBN's Liz Claman, Buffett said it was "100 percent a decision based on valuation."

Score one for Mark Mobius, who kept buying as PetroChina kept rising, and as Buffett kept selling. The final victory, however, is yet to be declared. PetroChina shares are down from their highs for the year in late-October, although still above where they were as Buffett was getting out.




While Buffett's ability as an investor is almost universally applauded, his call for billionaires like him to pay more in taxes didn't generate as much enthusiasm, at least among many fellow members of the Forbes 400 club.

Buffett generated national general-news headlines in late October when he did an interview with Tom Brokaw on NBC Nightly News in which he argued that the very rich pay a lower tax rate than ordinary Americans, because payroll taxes are capped at a certain income level and capital gains are generally taxed at a lower rate than ordinary income. (Buffett likes to cite his own survey of the people who work for him at Berkshire headquarters. Of all 15 of those who voluntarily participated, his tax rate is the lowest.)

He followed up that interview with an appearence before the Senate Finance Committee in November, where he argued against the total elimination of the nation's estate tax, telling the panel, "A progressive and meaningful estate tax is needed to curb the movement of a democracy toward a plutocracy."

Critics, led by anti-tax conservatives, called Buffett hypocritical, or at least self-deceived. On Squawk Box, Joe Kernen questioned Buffett's viewson taxes. Based on your emails to Warren Buffett Watch, many, but not all of you, agree with Joe and the critics.



As the nation's subprime mortgage meltdown and resulting credit crunch got worse, Warren Buffett kept reminding us that bad times can bring good opportunities, without getting into specifics, of course.

Over the last few months we saw reports he might be interested in Countrywide, Bear Stearns, and Britain's Northern Rock. Nothing appeared to came of it. Buffett himself reminded us that "speculation is just speculation" and a few weeks ago told CNBC's Becky Quick that he sees "enormous divergence" ahead for the financials.

Finally, in December, he made some moves. First, it was the purchase of some TXU high-yield ("junk") bonds for $2.1 billion, although he made it clear he liked those particular bonds, not junk in general.

Then Buffett unleashed his Christmas Day surprise: a $4.5 billion bet on the "future of the American economy" as he bought 60% of the Marmon Group from Chicago's wealthy Pritzker family. After rejecting all kinds of offers to buy a chunk of one troubled financial or another, Buffett was given the opportunity to buy into a conglomerate packed with "very basic American industry" and run by "terrific management." "There's nothing not to like," he told us. It took just two weeks to close the deal.

A few days later, another shocker: Buffett's announcement that Berkshire is getting into the bond insurance business, to compete with the established but weakened players in that field, like Ambac and MBIA. He promised not to make the same mistake of taking on too much risk and charging too little to do so. For good measure, Berkshire also paid $440 million for ING's reinsurance business.

As the New York Times neatly summed up all the year-end activity, "Warren E. Buffett is in no mood to quit."



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Here's the main reason you can't count out Warren Buffett: he beats the market .. a lot. As we begin the last trading day in 2007, Berkshire Hathaway's Class A shares are going for $141,100 each, an increase of over 28% from 2006's close of $109,990. (That's after they took a hit from Barron's and its 'Sell Buffett' cover story.)

Current price:

That's almost seven times better than the benchmark S&P 500 index, which is up 4.2 percent this year. It's also the best year for Berkshire's stock since 1998's 52 percent advance.

Earlier this year, an academic study found that Berkshire's stock portfolio beat the marketin 28 out of 31 years, and the average annual return of its portfolio outperformed the S&P by 14.65 percent from 1976 through 2006.

Warren Buffett would be the first to tell you he won't beat the market every single year. And there are still nay-sayers who think his best years are behind him. But I expect that when I'm writing '2008: The Year in Warren' he will once again be ahead of the game.

Here's to a happy, healthy, and profitable New Year.

Questions? Comments? Email me at buffettwatch@cnbc.com