Berkshire Hathaway posts big loss and piles up cash

Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) reported a net loss of $22.8 billion in 2022, due to market volatility. However, Berkshire’s “operating income,” which excludes certain capital gains and losses, rose to a record $30.8 billion. In his highly anticipated letter to shareholders, Buffett reiterated his faith in the US economy and called for overpriced share buybacks.

Rocky Q4 2022, but stocks outperform

Berkshire Hathaway moved to a loss of $22.8 billion in 2022 from a profit of more than $90 billion the year before. Market volatility and investment losses on derivative contracts totaling more than $67 billion played a part in that.

The company’s operating profit, not including capital gains or losses, for the fourth quarter of 2022 fell to $6.7 billion, down 14% from the prior quarter.

Despite the setback due to market volatility, Berkshire shares posted a 4% gain for 2022, vastly outperforming the S&P, which fell 18.1% including dividends.

Berkshire is the largest shareholder in eight of America’s largest companies: American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum, and Paramount Global, some of which write large dividend checks. .

“As for the future, Berkshire will always have plenty of cash and US Treasury bills alongside a wide range of businesses. We will also avoid behaviors that could result in awkward cash needs at inopportune times, including financial panics and losses of unprecedented insurance,” Buffett wrote.

Buffett expects to pay more taxes

According to Buffett, Berkshire was responsible for paying around 1% of all taxes collected by the US government in the last decade.

“We at Berkshire expect and expect to pay much more in taxes over the next decade. We owe the country no less: America’s dynamism has made a great contribution to whatever success Berkshire has achieved, a contribution Berkshire will always need,” he wrote. Buffett, betting that the growth of the US economy would prompt the company to pay more through corporate income taxes.

Buffett targets share buybacks

Not all stock buybacks are equal in Buffett’s eyes. While he mentioned that the Apple (AAPL) and American Express (AXP) buybacks were beneficial to Berkshire, the price of that buyback is key. Shares bought back at “prices that increase value” benefit all shareholders, but if the company overpays to buy back shares, shareholders lose, he said.

“When you are told that all buybacks are bad for shareholders or the country, or particularly beneficial for CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” he wrote.

No doubt Berkshire itself spent a fair amount of money on buybacks in 2021.

Buffett’s long-awaited letter cuts to the economic outlook

The Oracle of Omaha may have disappointed many investors with its latest annual letter to shareholders, which failed to provide an update on the economy. Buffett, now 92, has limited public appearances by him in recent years and the letter marks his first major communication with shareholders since the company’s annual meeting last April. Investors expected an update on the US economy and Buffett’s thoughts on inflation and a possible recession, but were left to read between the lines. With the company’s record operating profit performance, Buffett reminded investors that he and his partner Charlie Munger, 99, were “business pickers,” “not stock pickers.”

Treasury yields have soared to the highest level since the 2008 financial crisis after an aggressive rate-hike cycle by the Federal Reserve. Six-month and one-year yields have exceeded 5% for the first time since 2007, while the benchmark 10-year Treasury yield stands near 4%.

“Interest rates are to asset prices, you know, kind of like gravity is to the apple,” Buffett said earlier at the Berkshire annual meeting in 2013. His comments highlighted the “gravitational pull” that rates they can have on the shares, especially after years. interest rates close to zero. However, Buffett did not make any significant changes to the company’s portfolio that would suggest a scary outlook.

But one thing is for sure, Buffett remains optimistic about the long-term prospects for the US economy.

“Despite our citizens’ penchant, almost enthusiasm, for self-criticism and doubt, I have yet to see a time when it makes sense to make a long-term bet against the United States. And I highly doubt any reader of this letter will have a different experience in the future,” he wrote.

Berkshire a seller in Q4, but major holdings remain

Berkshire Hathaway’s 13F filing in mid-February shows the conglomerate was a net seller of shares in the fourth quarter. The company dumped a significant portion of its stake in Taiwan Semiconductor (TSM) while trimming its stakes in Bank of New York Mellon and US Bancorp. The conglomerate also shifted a large chunk of its position from cash to short-term Treasury bills, increasing its position from $9.6 billion to $17.6 billion.

Investors can use that presentation to gauge Buffett’s sentiments on the US economy for the rest of the year. Berkshire’s investments in bank stocks have been cut as the Federal Reserve slows the pace of rate hikes and that will add to the headwinds for the banking sector. Taiwan Semiconductor’s stake was only bought in the third quarter and may hint at geopolitical fears related to US-China diplomatic tensions. Despite selling these stakes, Berkshire Hathaway has not substantially increased its cash position, and Buffett is happy to keep his prized assets.

The bottom line

Investors waiting for an update on Warren Buffett and Charlie Munger’s thoughts on the US economy will have to wait until the annual shareholder pilgrimage on May 6. no storm clouds will accumulate anytime soon.