Berkshire Hathaway, the diversified, cash-rich investment vehicle/conglomerate controlled by Warren Buffett reported a record $49.7 billion loss - that's $30.65 per Class A share equivalent, compared with $21.66 billion, or $13,209 a share, from Q1 2019 - the largest quarterly loss in the conglomerate's history driven by $55.5 billion in unrealized losses in the conglomerate's massive stock portfolio, while its legendary cash pile grew to a record $137 billion.
As the coronavirus wiped more than three years' of gains from the US equity market in March, both Berkshire's investment portfolio and wholly-owned subsidiaries were "negatively impacted", though the company still managed to book an YoY increase in its quarterly operating profit, a sign that Berkshire's underlying businesses continued to grew despite the massive economic setback.
While Berkshire bought $1.8 billion of stocks on a net basis in the it and repurchased just $1.7 billion of its own stock, less than it did in the last quarter of 2019. The company recently disclosed that it sold some of its holdings in Delta Airlines and Southwest as airlines have been pummeled by travel restrictions and stay-at-home orders worldwide.
Unlike the last major economic crisis, which was brought about by the housing crash and Lehman's subsequent bankruptcy, the panic this time was caused by a public health emergency - decidedly not Buffett's forte (though his good friend Bill Gates has been very active in that regard).
So unlike last time, where Buffett swooped in to save the day, this time around, Berkshire is sitting back and biding its time (and so far failing to endorse the US economy as he did in 2008). As a result, the increase in Berkshire's massive cash pile was probably the most interesting development mentioned in the report. For those who have lost count, the $137 billion figure represents a $10 billion increase from the end of 2019; in that time, Buffett spent just $3.5 billion buying back Berkshire shares, while portfolio managers also adjusted their positions.
A couple of weeks ago, Munger told WSJ's 'Intelligent Investor' columnist Jason Zweig in an interview that Berkshire would be sitting this crisis out. "The phone is not ringing off the hook," Munger said - a reference to how the US government and Wall Street came knocking in 2008 to ask the Oracle of Omaha to step in and save the American economy (a favor for which Berkshire was handsomely rewarded). Munger said Berkshire "would shutter some businesses" which seems at odds with the fact that the conglomerate's Q1 operating income climbed YoY. Of course, that figure likely masks the vast differences in performance among Berkshire's subsidiaries.
Instead of stepping up to save the world, Buffett and Munger have been quietly tending to their cash pile and waiting for the next big opportunity to present itself.
For reference, Berkshire's 10-Q mentions COVID-19 31 times. Buffett also said the company has no official view on when market conditions will return to normal.
"As efforts to contain the spread of the Covid-19 pandemic accelerated in the second half of March and continued through April, most of our businesses were negatively affected, with the effects to date ranging from relatively minor to severe," the company said in the filing.
Berkshire’s Class A shares are down 19% this year through Friday’s close, which means Berkshire is underperforming the S&P, which has only fallen 12% in that time.
Here are some more highlights
- Q1 operating earnings: $5.871 billion, up from $5.555 billion last year ($5.56 billion expected by analysts
- Q1 investment gains: -$54.517 billion, down from $15.498 billion last year
- Q1 net earnings per A share: -$30,652, down from $13,209 last year
- Q1 net earnings per B share: -$20.44, down from $8.81 last year
More from Reuters:
- IN THE FIRST THREE MONTHS OF 2020, BERKSHIRE PAID $1.7 BILLION TO REPURCHASE SHARES OF CLASS A AND B COMMON STOCK
- BERKSHIRE HATHAWAY INC SAYS IT ENDED Q1 WITH $137.3 BLN CASH AND EQUIVALENTS
- BERKSHIRE OWNED $63.8 BILLION APPLE AAPL.O SHARES AS OF MARCH 31, COMPARED WITH REPORTED $73.7 BLN AS OF DEC 31
- BERKSHIRE OWNED $20.2 BILLION BANK OF AMERICA BAC.N SHARES AS OF MARCH 31, COMPARED WITH REPORTED $33.4 BLN AS OF DEC 31
- BERKSHIRE OWNED $9.9 BILLION WELLS FARGO WFC.N SHARES AS OF MARCH 31, COMPARED WITH REPORTED $18.6 BLN AS OF DEC 31
- BERKSHIRE OWNED $17.7 BLN COCA-COLA CO KO.N SHARES AS OF MARCH 31, COMPARED WITH REPORTED $22.1 BLN AS OF DEC 31
- MOST OF CO'S BUSINESSES NEGATIVELY AFFECTED IN SECOND HALF OF MARCH AND THROUGH APRIL DUE TO CORONAVIRUS
- BERKSHIRE HATHAWAY- CANNOT RELIABLY PREDICT WHEN BUSINESS ACTIVITIES AT CO'S NUMEROUS AND DIVERSE OPERATIONS WILL NORMALIZE
As WSJ reminds us, Berkshire’s quarterly earnings are especially volatile "due to an accounting rule that went into effect in 2018 requiring companies to include unrealized investment gains or losses in their net income. Berkshire holds large stock investments, and their quarterly changes in value can have a big effect on Berkshire’s net income."
Berkshire's money managers explained away the unrealized ~$55 billion loss in Berkshire's stock portfolio as "largely meaningless," since Berkshire isn't planning on liquidating any of its positions.
Investment gains/losses from periodic changes in securities prices will continue to cause significant volatility in our consolidated earnings. We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We continue to be
Notably, the unrealized loss from Q1 more than offsets the $53.7 billion unrealized gain Berkshire reported for Q4 2019.
However, despite the immense headwind created by the coronavirus during the second half of the quarter, Berkshire still managed to report an increase in operating earnings.
Operating earnings, which exclude some investment results, climbed to $5.87 billion from $5.56 billion for Q12019. Buffett and his No. 2, Charlie Munger, have long insisted that the operating earnings line is more reflective of the company's actual performance.
Before we go, we'd like to share an observation from Bloomberg's report: "Warren Buffett has been waiting years for stocks to look more attractive. He apparently didn’t think the first-quarter plunge was that opportunity."
Jeffrey Gundlach and other Wall Street luminaries have been warning that the April rebound isn't so much an affirmation of economic 'green shoots' as just another bubble blown by the Fed, and that they expect the market to take out the March lows before all of this is over.
Are Buffett and Munger also in the bear camp? We doubt we'll get a straight answer. The two will host Berkshire's first all-virtual annual shareholder's meeting later on Saturday.
Read the 10-Q below: