Berkshire Hathaway, the investment fund managed by the famous Warren Buffet announced its results for the 3rd quarter on Friday, not much of a surprise as the fund is diversified compared to many but still very much involved in the finance/insurance sector. Berkshire managed earnings of 682$ per share, a decline of 77% and a fourth straight decline in these quarterly earnings.
Management has said it was possible to look at these results as either a half empty or a half full glass. Berkshire was helped in doing better than the market by the fact that Warren Buffet had set aside important amounts of cash because he claimed to not see any attractive valuations out there. But that is about to change as he has commited, among others, to $27 billions in investments in General Electric and Goldman Sachs, two cases in which the cash stripped companies had to give very attractive terms to the Omaha company. Deals and investments reduced Berkshire’s cash holdings to $33.4 billion on Sept. 30 from $47.1 billion a year earlier
The loss on derivatives comes mostly from a much discussed bet that Warren Buffet made. Basically, Warren Buffet sold Puts on 4 stock indexes that will expire from 2019 to 2027!! So he received that amount that he can now invest and has to put a reserve in case those indexes are under the determined strike at that date. Sounds like an irregular strategy for Buffet who has called derivatives “weapons of financial destruction” in the past, but let’s not judge the Sage of Omaha, he usually knows what he’s doing. “The contracts were entered into with the expectation that amounts ultimately paid to counterparties for actual credit defaults or declines in equity index values [measured at the expiration date of the contract] will be less than the premiums received,” Berkshire said. But some are doing just that. Kyle Bass, managing partner of Hayman Advisors said: “Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed,” Bass wrote. “Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don’t.”
Another loss came from hurricanes Gustav and Ike, which apparently caused losses in the order of $1.05 billions in the current quarter.
All of these factors explain the 20% or so loss so far this year for Berkshire stock, which has increased in 17 of the past 20 years.