On Saturday, investors from around the world gathered at Berkshire Hathaway’s headquarters for its annual shareholder’s meeting in Omaha, Nebraska, an event billed as “Woodstock for Capitalists.”
Berkshire is one of the best-known conglomerates in the business world, led by Warren Buffett, perhaps the most famous investors in the world.
Buffett, its chief executive, is known as the “Oracle of Omaha” for his stock picking abilities.
This year, as he does every year, he spoke candidly about how Berkshire has been doing over the last year.
But in a surprise to some, the company reported a loss of more than $1 billion for the first quarter of 2018, its first loss in nine years.
What sparked Berkshire Hathaway’s losses?
The losses stem in part from swings in the stock of two of Berkshire’s biggest holdings, Coca-Cola, and Wells Fargo, and a new accounting rule that requires companies to account for losses even though they may be unrealized.
We’ll explain what that means in a second, but here’s what Buffett had to say about that in his annual letter:
“The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s ‘bottom-line’ will be useless.”
Quick explainer: What’s an unrealized loss?
An unrealized loss is when an investor owns stock in a company whose stock falls, but does not sell that stock. In contrast, a realized loss is when the stock falls, and the investor sells, thereby locking in his losses.
Berkshire is one of the best-known conglomerates in the business world, led by Warren Buffett
In Berkshire’s case, it did not sell off its position in the stocks that lost money. Nevertheless, it had to account for the losses in its financial statements. (Other losses stemmed from payouts related to its insurance businesses, as three hurricanes caused billions of dollars of damage in the South last year, Buffett writes in his letter.)
Buffett to investors: Look at our operating profits
Buffett called the new accounting rule a “nightmare,” and urged investors to look at the company’s operating profit, which increased 49% to $5.3 billion. Operating profit is the profit a company makes, excluding income from investments and derivatives, which are contracts between buyers and sellers based on an underlying stock, bond, or some other asset.
What else did Warren Buffett talk about?
Berkshire-Hathaway is a huge conglomerate, comprising dozens of business including well-known names such as battery maker Duracell, See’s Candies, and Fruit of the Loom underwear, not to mention car insurer Geico and other home and specialty insurance carriers.
It also has enormous stock ownership positions, worth $170 billion, in dozens of well-known companies including American Express, Apple, Bank of America, and Coca-Cola.
At the meeting, Buffett and his vice chairman and business partner Charlie Munger, had some positive words for numerous companies whose stock the company holds.
Buffett was thumbs up on Apple. In February, Berkshire increased its ownership of Apple shares to a stake worth more than $28 billion, and it recently upped its stake in the iPhone maker to nearly $44 billion, according to reports. And on Saturday, Buffett said he was glad to see Apple buying back $100 billion worth of its shares.
“I’m delighted to see [Apple] repurchasing shares,” Mr. Buffett said, according to the New York Times. “We own 5 percent of it. With the passage of a little time, we may own 6 or 7 percent because they repurchase shares.”
In addition to Apple, Buffett also reportedly talked about tech companies Microsoft, Google parent company Alphabet, and Amazon. In particular, he noted the miraculous success Amazon has had over the years.
He had good things to say about Wells Fargo. This came as a surprise to many investors, because the bank has lurched from scandal to scandal for years, including illegally signing up customers for fake bank and credit card accounts.
“All the big banks have had troubles of one sort or another,” Buffett told the room, according to the Wall Street Journal. “And I see no reason why Wells Fargo as a company, from both an investor standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes.”
Negative word for cryptocurrencies, such as Bitcoin, calling them a breeding ground for charlatans, and said they will “come to bad endings,” he said, according to reports.
What else is happening at Berkshire Hathaway?
Buffett who is 87, is expected to step down from overseeing Berkshire in the coming years. His co-founder, Munger, 94, is expected to take his leave as well.
Buffett made two high-profile promotions in January that experts say indicate who will take over the company. He made Gregory Abel, 55, vice chair of the company’s non-insurance businesses, according to a company press release. Abel currently heads up Berkshire Hathaway Energy. He also promoted Ajit Jain, 66, to be vice chair of the company’s insurance group. Jain is the executive vice president of Berkshire’s National Indemnity Company, the release says.
Both executives, who have been at Berkshire Hathaway for decades, were also named directors of the company’s board, which increased in size to 14 people from 12 to accommodate the new members.
How did Warren Buffett become Warren Buffett?
Buffett started out small, working a paper route as a boy in Nebraska, and holding various odd jobs, until he eventually bought a struggling Massachusetts cloth mill called Berkshire Hathaway in 1962.
Much of Berkshire Hathaway’s success has been based on Buffett himself, who built the company from a struggling cloth spinning company, to its current gargantuan size.
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