Berkshire Hathaway's Earnings Decline

Although the government puts out a slew of statistics on the economy, there is no better measure of how the capital markets are performing than by examining the quarterly earnings of Berkshire Hathaway. The company is the investment vehicle of Warren Buffet, without a doubt the most canny investor in America. He buys only those stocks that he believes are undervalued and operate in businesses he understands. The fact that the company's earnings were down 42% in second quarter 2004 compared to second quarter 2003 speaks volumes about American business.

Berkshire Hathaway stock (NYSE: BRKA) is a bit too expensive for most, running at $85,000 or so a share. The earnings per share this quarter came in at $862, down from $946 a year ago. The difference came from investment gains and losses. This year, the company had second quarter investment losses of $172 million. A year ago, the company had second quarter investment gains of $905 million. Mr. Buffet's insurance companies largely saved the day otherwise.

However, if the most successful investor in the US lost money this latest quarter compared to making millions a year ago, that is a pretty clear indication that the market has become much more difficult. Mr. Buffet and his investment managers don't go in for day-trades and such, but their much more conservative style still didn't prevent losses. The fact is, it is very difficult to find good investment opportunities in the current US market.

Mr. Buffet has been a seller for some time now, although as a proportion of his portfolio his sales are small. In the fourth quarter of 2003, he dumped $430 million in equities and followed that up with $150 million in the first quarter of 2004. The second quarter is likely to show a continuation of this trend. With $41 billion in his pocket, that doesn't amount to much, but he does like to keep an eye on the small change, and these days, he's keeping more of it in cash.

So, where does that leave the small investor? Simply put, if Warren Buffet is holding more cash, and if he's losing money on those stocks he does choose to hold, perhaps one ought to be a bit more skeptical the next time the broker calls with a hot tip.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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