It’s been an “interesting” year on Wall Street. I say interesting with quotes because we have witnessed some truly unprecedented economic data and headlines. In no particular order, we have:
As if that weren’t enough, Wall Street was honored with a catchy headline after the release of Berkshire Hathawayit is (BRK.A 1.66%) (BRK.B 1.71%) earnings report as of August 6, 2022. In the three months ended June 30, 2022, Berkshire Hathaway lost – and I hope you’re sitting for this – $43.76 billion.
How on earth did Berkshire CEO Warren Buffett, one of the greatest investors of our generation, manage to lose nearly $44 billion in three months? Let me spoil you: all is not as it seems in Berkshire’s quarterly earnings report.
Berkshire Hathaway’s Historic Quarterly Loss Isn’t What It Seems
In 2016, the Financial Accounting Standards Board adopted new measures to make corporate tax filings and generally accepted accounting principles (GAAP) reporting more transparent to investors. One such measure, ASU 2016-01 (“Recognition and Measurement of Financial Assets and Financial Liabilities”), eliminated the need to classify various categories of equity investments and instead required that Equity investments are measured at fair value. This meant that changes in equity investments from quarter to quarter would be recognized in net income or net loss. Berkshire Hathaway formally adopted this accounting change in its reporting beginning in 2018.
In simpler terms, the closing price of Warren Buffett’s investments on March 31, 2022 represented their fair value at the end of the first quarter. By comparison, the closing price of the securities on June 30, 2022 represented their fair value at the end of the second quarter. In addition to counting realized gains and losses recognized through the sale of stock, ASU 2016-01 requires Buffett’s company to recognize unrealized gains and losses resulting from stock price fluctuations in its stock portfolio. investment from quarter to quarter.
During the second quarter, the three major US equity indices were hit hard. The timeless Dow Jones Industrial Averagewide seat S&P500and technology-centric Nasdaq Compound respectively plunged by 11.3%, 16.5% and 22.4% in three months. Unsurprisingly, Berkshire Hathaway’s investment portfolio also took it on the chin. This resulted in a staggering $66.9 billion “loss” on investments and derivatives contracts in just three months, and the aforementioned net loss of almost $44 billion for the second quarter.
Warren Buffett’s business is stronger than ever
Did Warren Buffett lose nearly $44 billion in three months? On paper, and based on financial need, yes. But when you look at what matters, it was another successful quarter for the Oracle of Omaha and company.
For starters, Warren Buffett and his investment lieutenants, Todd Combs and Ted Westchler, are not traders. While they may chase rare arbitrage play or high-yielding stocks in an inflationary environment, most of Berkshire Hathaway’s more than four dozen holdings are longer-term investments. In fact, the Oracle of Omaha has held 15 stocks continuously for at least a decade. Stocks will always fluctuate, making unrealized gains and losses a moot point in Berkshire Hathaway’s quarterly operating results.
A much better measure of Warren Buffett’s success as an investor can be found in his annual letter to shareholders. In this letter, investors can see that Class A shares of Berkshire Hathaway (BRK.A) have generated an average annual return of 20.1% since the Oracle of Omaha became CEO in 1965. Imagine a return annual average of 20.1% for 57 years!
To add, “unrealized losses” is just another phrase that signifies opportunity for Warren Buffett. A falling stock market presents the Oracle of Omaha and his investment team with the opportunity to deploy their massive stack of cash into stocks, acquisitions, or even stock buybacks. The fall in the stock market during the second quarter allowed Buffett to buy $57.3 billion in equity securities, as well as $1 billion in the company’s Class A and B common stock. Buffett and his right-hand man Charlie Munger have overseen $62.1 billion in stock buybacks since July 2018.
Another thing investors should note is that the more than five dozen entities owned by Berkshire Hathaway performed extremely well during the difficult second quarter (Q2). Total insurance revenue reached $3 billion, from $1.9 billion in the second quarter of 2021, while BNSF Railroad saw its quarterly profit increase to $2.15 billion, from $1. $98 billion in the prior year quarter. In total, Berkshire Hathaway’s operating businesses increased net income to $10 billion in the second quarter of 2022 from $8.6 billion in the year-ago period.
Of course, Warren Buffett oversaw a “loss” of almost $44 billion in the second quarter. However, his business is as strong as it has ever been.
Sean Williams has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.