Buffett's Son Calls Junk Bonds Model for Charities' Risk Taking

Friday, 18 Oct 2013 08:56 PM

 

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Howard Buffett, who runs a foundation with money from his billionaire father Warren Buffett, said high-yield debt is an inspiration for the right approach to philanthropy.

Promoting economic development in an area of conflict in the Democratic Republic of Congo “is a risky investment, but if that pays off, I would say it’s a little bit like we’re willing to go with junk bonds rather than AAA stocks because the payoff is big.” Howard Buffett, 58, told Bloomberg Television’s Betty Liu. “We’re betting, we won’t just help people eat better, we will transform their lives.”

The Howard G. Buffett Foundation works to improve the lives of the world’s most impoverished people, with a focus on providing access to food and water and ending conflicts. Warren Buffett, who has committed most of his wealth to philanthropy, including initiatives run by his three children, has also encouraged charities to take risks.

“We don’t have to worry about making donors happy, we don’t have to worry about fundraising, we don’t have to worry about anything other than can we change something,” Howard Buffett said. “And to do that you absolutely have to be willing to fail. Your greatest lessons will come in failure.”

Warren Buffett, 83, built Omaha, Nebraska-based Berkshire Hathaway Inc. through more than four decades into a company valued at more than $280 billion in businesses including insurance, rail transport and energy production. He has said that after he leaves Berkshire, Howard would be an effective non-executive chairman.

Innovation, Risk

The younger Buffett, a farmer who is on the board of Coca-Cola Co., said the foundation applies many lessons from his father including a focus on quick decisions and new approaches.

“Businesses that are innovative and take risk win,” Howard Buffett said. “Those who sit around and don’t change and aren’t willing to take risk are out of business.”

Junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB-minus at Standard & Poor’s. The $1.2 trillion market for U.S. junk bonds yields about 6.6 percent, double what’s offered by higher-rated company debt, according to Bank of America Merrill Lynch index data.

The elder Buffett has shunned bonds in recent years, saying that near record-low yields aren’t enough to compensate for the risk of inflation. Buffett lamented in 2010 that he didn’t buy more corporate and municipal bonds during the credit crisis when yields made the securities “ridiculously cheap” compared with U.S. Treasuries.

‘Raining Gold’

“Big opportunities come infrequently,” he wrote in a letter to shareholders. “When it’s raining gold, reach for a bucket, not a thimble.”

Warren Buffett has said philanthropies must take risks and accept that some decisions will go wrong.

“Intelligent charity, big-time charity should tackle things where it’ll fail,” he said at a 2011 event in Bangalore. “If you succeed in everything you’re doing in charity, you’re attempting things that are too easy.”

For Howard Buffett, risk means operating in regions of conflict, rather than holding off efforts until peace emerges.

“We learned this in Afghanistan, you have to give people hope,” he told Liu. “We’re investing in the middle of the conflict because we believe it gives people not just hope, but it gives them more reason to say, ‘We want this conflict to end.’ So we believe in taking the risk.”

© Copyright 2014 Bloomberg News. All rights reserved.

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