Accounting rule Warren Buffett loathes boosts Berkshire's bottom line to $81B
What should Warren Buffett do with his billions?
Huntington Private Bank CIO John Augustine discusses what Berkshire Hathaway CEO Warren Buffett should buy next.
Berkshire Hathaway earned $81.4 billion last year, an exponential increase from the year before, but it's mostly because of an accounting rule that billionaire CEO Warren Buffett vehemently disagrees with.
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About $53.7 billion of the 2019 profit was due to appreciation in the value of the Omaha, Nebraska-based company's stock holdings, which regulators now require Berkshire to include in its bottom line even though Buffett didn't cash in on those gains by selling shares.
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The policy change, imposed in 2018, is a sharp reversal from the previous rule that generally allowed companies to include such valuation changes only when they were realized through a sale.
Berkshire's earnings reports filed under the new system "glaringly illustrate the argument we have with the new rule," the 89-year-old dubbed the "Oracle of Omaha" for his investing prowess wrote in his annual letter to investors published Saturday.
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In 2018, when the Dow Jones Industrial Average sank 5%, the value of Berkshire's holdings sank by $26 billion, so full-year profit was only $4 billion, he noted.
Juxtaposed with last year's increase, as the Dow surged 22%, "those market gyrations led to a crazy 1,900% increase" in earnings, Buffett said.
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"Meanwhile, in what we might call the real world, as opposed to accounting-land, Berkshire's equity holdings averaged about $200 billion during the two years, and the intrinsic value of the stocks we own grew steadily and substantially throughout the period," he added.
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At the end of 2019, Berkshire's stock holdings of $248 billion included a 19% stake in credit card company American Express worth $18.9 billion, a $74 billion stake in iPhone-maker Apple and 9.3% of Coca-Cola's outstanding stock, valued at $22 billion.
Over time, Buffett said, he expects Berkshire's stock portfolio to deliver "major gains, albeit in an unpredictable and highly irregular manner."
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