Berkshire Hathaway Posts A Big Loss, Hoards Cash

Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) reported a a net loss of $22.8 billion in 2022, due to market volatility. However, Berkshire’s “operating income” that excludes certain capital gains and losses, rose to a record $30.8 billion. In his much awaited shareholder letter, Buffett reiterated his faith in the American economy and took aim at overpriced share buybacks.

Rocky Q4 2022, But Stock Outperforms

Berkshire Hathaway swung to a loss of $22.8 billion in 2022 from a profit of more than $90 billion in the previous year. Market volatility and investment losses on derivatives contracts totaling more than $67 billion played a big role in that.

The company’s operating earnings, exclusive of capital gains or losses, for the fourth quarter of 2022 fell to $6.7 billion, down 14% from the previous quarter.

Despite the setback on account of market volatility, Berkshire stock had a 4% gain for 2022, vastly outperforming the S&P, which fell 18.1% including dividends.

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

“As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses,” Buffett wrote.

Buffett Hopes To Pay More Taxes

According to Buffett, Berkshire was responsible for paying about 1% of all tax collected by the U.S. government in the last decade.

“At Berkshire we hope and expect to pay much more in taxes during the next decade. We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need,” Buffett wrote, betting that growth in the American economy would propel the company to pay more via corporate income taxes.

Buffett Takes Aim At Stock Buybacks

Not all share buybacks are equal in Buffett’s eyes. While he mentioned that repurchases by Apple (AAPL) and American Express (AXP) were beneficial to Berkshire, pricing of that buyback is key. Shares bought back at “value-accretive prices” benefits all shareholders but if the company overpays for buying back shares, shareholders lose he said.

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

To be sure, Berkshire itself spent a good amount of money on buybacks in 2021.

Much-Anticipated Buffett Letter Short on Economic Outlook

The Oracle of Omaha may have disappointed many investors with his latest annual shareholder letter, which failed to provide an update on the economy. Buffett, now 92, has limited his public appearances in recent years and the letter marks his first major communication with shareholders since the company’s annual meeting last April. Investors had been hoping for an update on the U.S. economy and Buffett’s thoughts on inflation and a potential recession but were left to read between the lines. With the company’s record return for operating earnings, Buffett reminded investors that he and long-time 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 Federal Reserve rate hike cycle. Six-month and one-year yields have topped 5% for the first time since 2007, while the benchmark 10-year Treasury yield sits near 4%.

“Interest rates are to asset prices, you know, sort of like gravity is to the apple,” Buffett previously said at Berkshire’s annual meeting in 2013. His comments highlighted the “gravitational pull” that higher rates can have on equity, especially after years of near-zero interest rates. However, Buffett made no meaningful changes to the company’s portfolio that would suggest a fearful outlook.

But one thing’s for sure, that Buffett continues to remain optimistic about the long-term expectations from the American economy.

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

Berkshire a Seller in Q4, but Top Holdings Remain

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

Investors can use that filing to gauge Buffett’s feelings about the U.S. economy for the rest of the year. Berkshire’s investments in banking stocks have been trimmed as the Federal Reserve slows its rate hike pace and that will add a headwind to the banking sector. The Taiwan Semiconductor stake was only purchased in Q3 and may hint at geopolitical fears related to U.S.-Chinese diplomatic tensions. Despite selling these holdings, Berkshire Hathaway has not substantially increased its cash position and Buffett is happy to hold onto his prized assets.

The Bottom Line

Investors hoping for an update on Warren Buffett and Charlie Munger’s thoughts on the U.S. economy will have to wait until the annual shareholder pilgrimage on May 6. Until then, the company’s willingness to hold onto its current stock holdings will provide reassurance that the famed investors see no storm clouds gathering in the near term.