Berkshire Hathaway Inc. (BRK.B) (BRK.A) "earned" $4 billion in 2018 under new accounting rules that skewed results from previous years and showed wild losses in the first and fourth quarters, as warned by Chairman Warren Buffett in 2017.
The 2018 earnings included $24.8 billion in operating earnings, a $3 billion non-cash loss from an impairment of intangible assets -- mainly from equity interest in Kraft Heinz Co. (KHC) , which took a beating this week -- and $2.8 billion in realized capital gains from the sale of investment securities. Most dramatic, under new accounting rules, the earnings also included a $20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in Berkshire's investment holdings.
"A new GAAP rule requires us to include that last item in earnings. As I emphasized in the 2017 annual report, neither Berkshire's Vice Chairman Charlie Munger nor I believe that rule to be sensible," the billionaire Buffett wrote Saturday in his annual letter to Berkshire shareholders, a widely watched tradition since 1965. "Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as 'wild and capricious swings in our bottom line.'"
Buffett had spoken with great hesitation about the new generally accepted accounting requirements in his letter posted last year. In this year's missive, he wrote that 2018's non-adjusted first and fourth quarters, Berkshire posted losses of $1.1 billion and $25.4 billion. Yet in second and third quarters, it reported profits of $12 billion and $18.5 billion, demonstrating the swings caused by the rule.
"In complete contrast to these gyrations, the many businesses that Berkshire owns delivered consistent and satisfactory operating earnings in all quarters," Buffett wrote. "For the year, those earnings exceeded their 2016 high of $17.6 billion by 41%."
But he warned that wide swings in quarterly earnings would go on, simply because of Berkshire's massive equity portfolio valued at nearly $173 billion at the end of 2018.
Buffett also wroted that he hopes to spend excess liquidity buying new businesses that Berkshire will "permanently own," but said the forecast for that was cloudy.
"Prices are sky-high for businesses possessing decent long-term prospects," the mega-investor wrote. "That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition." The 88-year-old added that just the idea of such a buy makes his heart "beat faster."
- 17.9% of American Express Co. (AXP) vs. 17.6% the previous year.
- 5.4% of Apple, compared with 3.3% a year earlier.
- 9.5% of Bank of America vs. 6.8% in 2017.
- 8.8% of Bank of New York Mellon Corp. (BK) vs. 5.3% a year ago.
- 9.6% of Delta Air Lines (DAL) compared with 7.4% the year prior.
- 8.7% of Southwest Airlines (LUV) vs. a previous 8.1%.
- 9.1% of U.S. Bancorp compared with 6.3% in 2017.
- 9.8% of Wells Fargo (WFC) vs. 9.9% the year prior.
Buffett didn't discuss Kraft Heinz in depth in the letter despite the food company's recent earnings report that startled investors with news of a dividend cut, an earnings misses and a subpoena from the U.S. Securities and Exchange Commission. However, Buffett did attribute big losses from Kraft in the opening of his letter.
Buffett is worth some $84 billion, just below Microsoft's (MSFT) Bill Gates and world's richest man, Jeff Bezos of Amazon.com Inc. (AMZN) , according to Forbes' billionaire's list. He's reportedly given away well over a third of that amount to charity since 2007 or so.
This story has been updated.