BEHIND THE NEWS: The sagest of investors takes drubbing on WellPoint bet

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Here’s some news that might be comforting as you fret over your depleted stock portfolio: Even Warren Buffett, the oracle of Omaha, gets it wrong sometimes.

At least he’s wrong so far on Well-Point Inc., the giant Indianapolis-based health insurer.

His Berkshire Hathaway Inc. began scooping up shares in the company in the first quarter of 2007. By June of last year, it had acquired 4.2 million shares. And by the end of the first quarter of this year-the latest period available-the stake had grown to 4.8 million shares.

Here’s the painful part: Berkshire jumped in just as the stock was ending a five-year run. It plateaued in 2007 before diving this spring. The Omaha company bought most of its WellPoint shares for at least $75 apiece-far north of the current $48 stock price. Even though Berkshire boosted its WellPoint holding by 300,000 shares during the first quarter, its value fell $183 million.

No doubt, none of this is causing Buffett to lose sleep. The WellPoint investment-currently valued at $230 million-represents a sliver of Berkshire’s investment portfolio. And even at age 77, Buffett is famous for keeping a long-term perspective. The billionaire has held some stocks for decades and doesn’t get knotted up over short-term fluctuations.

Even so, the decline in WellPoint stock-which was driven largely by scaled-back profit expectations the company announced in March-raises interesting questions.

For starters, has Berkshire viewed the plunge as a buying opportunity? The company will shed light on that next month when it discloses its holdings as of June 30. An even more intriguing question: Will Berkshire, already a big player in insurance, seek to buy Well-Point outright?

“I don’t see [the latter] as a significant likelihood,” said Chuck Hamilton, an analyst following Berkshire for FTN Midwest in Nashville, Tenn.

Still, he adds, “It’s hard to see into the mind of Warren Buffett. If we could, we’d all be rich.”

Here’s the case for a buyout: Berkshire is sitting on a whopping $35 billion in cash-giving it ample firepower to pursue WellPoint, whose market value has fallen to $25 billion. And Berkshire needs to think big. The company has grown so large that it needs megadeals to juice its growth rate.

“I’m not looking for Pet Rock or Hula Hoop businesses,” Buffett said in May during a swing through Europe sizing up potential acquisition targets. “I’m looking to make big deals, whether it’s in the United States or Germany or Italy or Denmark.”

And insurers long have been a Berkshire favorite. Insurance units chipped in nearly one-third of the company’s 2007 revenue. Among Berkshire’s bestknown holdings is Geico Corp., which uses a ubiquitous gecko to hawk auto policies.

“I would say we have a special affinity for insurance,” Buffett said at a news conference last year.

Here’s the flip side: Berkshire often favors buying private companies, which tend to sell for more reasonable prices. Because public company boards have a duty to all shareholders, they typically play suitors off one another in a quest to drive up the price.

“They don’t like to go into auction deals,” Hamilton said of Berkshire. “They don’t like to have to outbid other companies.”

And a value investor like Buffett has lots of options these days. Berkshire has dozens of holdings-including Well-Point rival UnitedHealth Group Inc.-and many of them are trading at steep discounts to recent highs.

Whatever Berkshire’s strategy with WellPoint, you can be sure its investment managers aren’t fretting about holding an outof-favor stock. Similar contrarian bets have made the company bundles over the years.

When American investors went gaga over Internet stocks around the turn of the century, for instance, Buffett sat comfortably on the sidelines.

“We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement,” he wrote to shareholders in early 2001.

WellPoint isn’t exactly a sexy business, either. But the marketer of Blue Cross Blue Shield health insurance does have a strong market position and a powerful brand name. The big question now: Will that be enough to save what so far has been a loser investment for Berkshire?

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