Buffett’s Billions: How Berkshire Hathaway is cutting a path to profits of $30 billion dollars
Berkshire Hathaway and its 90-year-old founder, Warren Buffett, have been household names on Wall Street since most people can even remember. The legendary investor’s strategies, while not always right on the money have garnered him the nickname the “Sage” of Omaha, and a net worth of about $78.9bn. Some of his most audacious deals include the purchase of Coca-Cola stocks in the 80s and the acquisition of Bank of America stock right after the 2008 crisis, eventually leading to Berkshire becoming the bank’s biggest shareholder.
2020 has proven to be quite a challenging time for Mr Buffet and his sterling reputation. His decision to dump airline stocks earlier this year has proven to be wrong as governments all over the world jumped in to save the struggling companies by approving a $50bn dollar support package. This mistake got people wondering if the “Sage” had lost his touch. Recent events have proven otherwise.
In its third quarter, Berkshire reported a massive increase in net earnings of over 82% from last year to $30bn. This significant surge is mainly due to Berkshire’s golden portfolio, which contains big stakes in Coca-Cola, Apple, Bank of America and American Express. In its third quarter, Apple went up more than 26%, while Coca-Cola increased by 10.5% over the same period. The only part that didn’t seem to go well for the investment firm is its insurance business, which brought operating earnings down by 30% from last year.
These profit surges come at a time of unprecedented buybacks for the company. Buybacks refer to the purchasing of stock by the company that issued them. The issuing company pays shareholders the market value per share. Berkshire almost doubled the $5.1bn spent in the second quarter on repurchases, reaching a total of $15.7bn for 2020. The international conglomerate bought $2.5bn in Class A shares and $6.7bn in Class B stocks during the quarter. These buybacks were made with the hope of reducing the massive cash pile that Berkshire has been accumulating for the last decade. It did little in that regard, as the amount only dropped from $146.6bn in the second quarter to $145.7bn. Buffet explained the reasoning he and his partner Charlie Munger used in his letter addressing stockholders earlier this year: “Our thinking, boiled down: Berkshire will buy back its stock only if a) Charlie and I believe that it is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash.”
The “Sage” also expanded his company’s reach into Japanese trading houses, placing an investment of $6bn in Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. Berkshire also invested in the IPO of Snowflake, a cloud database company. Since their IPO in September, stocks have surged, reaching a market cap of $66.7bn. The move was spearheaded by one of Buffett’s deputies, Todd Combs. These moves are a novelty for the investment giant as Buffett usually preferred to put his money into American companies.
Investors were pleased to see that Berkshire’s third quarter acquisitions skyrocketed stock gains, reaching double the values of the S&P 500 for the last 6 months.
Geico, the auto insurance company, which is owned by Berkshire, was affected negatively by the pandemic. Earnings fell by a quarter as the company was forced to hand money back to clients through “policyholder dividends”, as fewer and fewer people are driving, accidents, therefore, lowering in number. Another company owned by Berkshire that is affected by the pandemic is BNSF Railway Co. which saw a slump in revenue in its third quarter.
All in all, Mr Buffet has shown that his investing edge is not gone yet, as recent deals have proven. Berkshire is not yet out of the woods, Covid-19 is still raging across the World, forcing many countries to again implement quarantines. Tensions across the US are growing ever higher as President Trump’s refusal to concede the election to Joe Biden could result in great periods of uneasiness and large fluctuations in the stock market. Only time will tell how the “Sage” of Omaha will navigate his company through these challenging times. As the 2008 Crisis proved, Buffett can always bet against the current and make a fortune afterwards.