Financials

Warren Buffett’s Berkshire reins in stock purchases and books $43.8bn loss

Warren Buffett’s Berkshire Hathaway dramatically slowed new investment in the second quarter after setting a blistering pace at the start of the year, as the US stock market sell-off pushed the insurance-to-railroad conglomerate to a $43.8bn loss.

Berkshire said on Saturday that the drop in global financial markets had weighed heavily on its stock portfolio, which fell in value to $328bn, from $391bn at the end of March. The $53bn booked loss in the three months to June far outweighed an upbeat quarter for its businesses, which improved their profitability.

The company’s filing with US securities regulators showed its purchases of new stocks dwindled to about $6.2bn in the quarter, down from the $51.1bn it spent between January and March — a spurt that surprised Berkshire shareholders. Berkshire sold $2.3bn of stocks in the latest three-month period.

Berkshire also spent $1bn buying back its own shares in June, a commonly used tactic when Buffett and his investment team find fewer appealing targets in the market.

The 91-year-old investor signalled at the company’s annual meeting in Omaha, Nebraska, in April that the spree of multibillion-dollar stock purchases was likely to slow as the year progressed, saying that the atmosphere in the company’s headquarters had become more “lethargic”.

Column chart of Cash, cash equivalents and short-term Treasuries held ($bn) showing Berkshire Hathaway’s war chest

Investors will get a more detailed update on how Berkshire’s stock portfolio has changed later this month, when the company and other big money managers disclose their investments to regulators. Separate filings show the company has increased its stake in energy company Occidental Petroleum in recent months.

Berkshire’s mammoth cash and Treasury holdings were little changed from the end of March, falling less than $1bn to $105.4bn.

While net income slid from a $5.5bn profit at the year’s start to a $43.8bn loss, operating income — which excludes the ups and downs of Berkshire’s stock positions — rose 39 per cent to $9.3bn. That included a $1.1bn currency-related gain on its non-US dollar debt.

Berkshire is required to include the swings in the value of its stock and derivatives portfolio as part of its earnings each quarter, an accounting rule that Buffett has warned can make the company’s earnings figures look “extremely misleading” and volatile.

The loss amounted to $29,754 per class A share. It stands in contrast to the $18,488 per share profit the company reported a year earlier.

Line chart of Year-to-date performance (%) showing Berkshire has outpaced the broader US stock market this year

Berkshire’s results are parsed by analysts and investors for signs of the health of the broader US economy, as its businesses cut across much of the country’s industrial and financial heart.

Inflationary pressures continued to bite, although many of its divisions were able to pass along higher prices to customers. The BNSF railroad, which Buffett has described as one of the “four giants” within Berkshire, reported a 15 per cent increase in revenue as fuel surcharges it levied on clients offset a drop in shipping volumes. Fuel costs for BNSF, which has over 32,500 miles of rail tracks across 28 states, jumped more than 80 per cent year on year.

Insurance unit Geico recorded a $487mn pre-tax underwriting loss in the quarter, up from the three months before. The division blamed the bigger loss on much higher prices for new cars and auto parts that it must pay when its clients are involved in accidents.

Buffett in April said the company was seeing the effects of inflation first hand, warning that it “swindles almost everybody”.

Berkshire’s housing businesses, including modular home unit Clayton Homes and home decor retailer Nebraska Furniture Mart, offered hints about how consumers were responding to higher prices and increased mortgage rates. Furniture sales were relatively flat, with higher prices compensating for lower orders.

Nonetheless there were signs of strength in the housing market, with new housing sales from Clayton up 9.8 per cent in the first half of the year. Revenues for the division rose 28 per cent to $3.4bn in the second quarter from a year earlier.

“The increases in home mortgage interest rates will very likely slow demand for new home construction, which could adversely impact our businesses,” Berkshire warned. “We also continue to be negatively affected by persistent supply chain disruptions and significant cost increases for many raw materials and other inputs, including energy, freight and labour.”

Berkshire addressed a potential conflict raised at the company’s annual meeting earlier this year. In June it spent $870mn to purchase shares that Berkshire vice chair Greg Abel, Buffett’s anointed successor, held directly in its energy unit.

Abel joined the company in 2000 when Berkshire acquired the utility MidAmerican Energy, and had held part of his wealth in that business instead of in shares of the Berkshire parent company.

Shares of Berkshire Hathaway’s class A common stock have fallen roughly 2 per cent this year, outperforming the 13 per cent drop in the benchmark S&P 500.

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