Buffett's a Genius Again

As I noted in my March 28, 2006, column, "OK, Bash Buffett -- but Buy His Stock," writers such as Pulitzer Prize winner James Stewart and Jon Markman wondered if Buffett had lost his touch.

To understand why Buffett looked like he'd lost it in March and now looks like a genius again -- and why I'm selling my shares of Berkshire Hathaway today -- you've got to look at how Berkshire Hathaway makes its money.

I'd break down the company's earnings stream into three parts. First and foremost in investors' minds, there are the earnings from investing the huge amounts of cash thrown off by the company's insurance business. Second, there are the earnings from the insurance business itself. And, third, there are the earnings from Berkshire Hathaway's non-insurance operating businesses, such as clothing maker Russell or carpet maker Shaw Industries.

The problem recently hasn't been in that third segment, the non-insurance operating businesses, where 2005 was a good year. Earnings before taxes climbed by 27% from the third quarter of 2004 to the third quarter of 2005. And 2006 has so far been even better, with earnings before taxes from this part of Berkshire Hathaway climbing by 55% from the third quarter of 2005 to the third quarter of 2006.

To be completely fair, part of the growth in the earnings of this segment comes from Berkshire Hathaway's acquisition of new operating companies with cash from its insurance operation. But I think these numbers give you an idea of where the problem isn't.

Insurance Segment Rebounded

Berkshire Hathaway's insurance business was one of the places, on the other hand, where the problem was in 2005. From a profit before taxes of $387 million in the third quarter of 2004, the insurance group swung to a loss of $897 million in the third quarter, sometimes called the hurricane quarter, of 2005.