Warren Buffett's conglomerate interrupted a beautiful Saturday by reporting quarterly earnings.
But we'll forgive him. Because Buffett's empire touches, well, just about every aspect of the U.S. business landscape (okay, maybe not esports...yet), checking out Berkshire's quarterly reports gives us a window into the health of the economy.
Quick timeout: If you've never been to Berkshire's website before...here's a taste of what you can expect. Web developers, you might want to submit a résumé.
So...how'd it do?
At a high level—really darn well. Net income almost tripled, but per Buffett, chalk that up to a new accounting rule that requires you to include unrealized investment gains/losses in net income. Because Berkshire has so many investments, that number can fluctuate wildly.
Where you should be looking, he says, is operating income, which jumped 67% (topping expectations).
Let's dive a little deeper:
Its freight rail business (BNSF Railway) surged due to "general economic growth" generating higher demand for consumer and industrial goods (sand, fertilizer, grain). Insurance (GEICO and others) also rebounded. Underwriting profit came in at $943 million, up from a loss of $22 million last year. One catalyst for all this growth was the corporate tax cut. In Q2, Berkshire paid an effective income tax rate of 20%, down from 28.9% last year. And then there's tech: Tech? Buffett? You bet. Buffett has been steadily increasing his position in Apple. Which, you may have heard, hit $1 trillion in market cap last week. Now, $47.2 billion of Berkshire's ~$180 billion stock portfolio is invested in Apple.
Berkshire's other top holdings? American Express, Bank of America, Coca-Cola, and Wells Fargo. Bottom line, courtesy of one analyst: "Strength in Berkshire's portfolio of energy, transportation, service, retailing, and manufacturing businesses...reflect(s) broad U.S. economic strength."
By Money & Finance
When Buffett was starting his career he offered himself to work for free for Benjamin Graham, the pope of value investing and writer of Intelligent Investor, the bible of value investing.
Why would someone work for free? Because the experience and knowledge that you can get in this job is worth much more than money.
If you are young and in love with some activity, be open to work for free for someone that can inspire you in a positive way.
This video shows Warren himself explaining how his experience working with Graham has changed his life:
By Money & Finance
Here is a short paragraph from Berkshire’s 1993 letter:
“In many industries, of course, Charlie and I can't determine whether we are dealing with a "pet rock" or a "Barbie." We couldn't solve this problem, moreover, even if we were to spend years intensely studying those industries. Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly-evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?”
“Severe change and exceptional returns usually don't mix. Most investors, of course, behave as if just the opposite were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today's business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.
Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns. “
1987 letter to Berkshire Hathaway shareholders
Warren Buffet understands value investments and is exceptional at it. Also, value investments deal with hundreds of millions of dollars, and return hundreds of millions as well. These amounts make a difference to Buffet.
For a big investor like Buffet, a seed investment of $1 Mn which returns $5 Mn is nothing more than pocket change.
Berkshire generates $20-25bi per year in cash. Hard to invest this amount of money in startups.
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