Related topics: value stocks, Warren Buffett, stock market, investments, Berkshire Hathaway
Like most big-shot investors or Wall Street CEOs, Warren Buffett doesn't get overly worked up about quarterly earnings -- except when they're good.
Put another way, if Buffett were a weatherman, it would always be sunny in Omaha, Neb., even if the clouds were obscuring the sunshine.
That's why it doesn't come as much of a surprise that when Berkshire Hathaway (BRK.B, news) announced a disappointing 58% drop in first-quarter earnings, Buffett and his apologists began fast-talking.
The spin began even before the quarter ended. Berkshire was contacted in December by the Securities and Exchange Commission, with the regulators asking why Berkshire hadn't written down its investments in Kraft Foods (KFT, news) and Wells Fargo (WFC, news).
Berkshire's chief financial officer, Marc Hamburg, let loose with the first salvo, arguing that "each security's market price will grow to at least the intrinsic value that existed."
Ah yes, the old Buffett standby, "intrinsic value." Loosely put, intrinsic value is the value of a company or asset based on the underlying perception of its true value, including all aspects of the business in terms of tangible and intangible factors.
In other words, who cares what anybody would actually pay for those Kraft and Wells Fargo assets? What Berkshire investors should remember is how valuable Buffett really thinks they are.
Enter Ingrid Hendershot, writing for Seeking Alpha: "(A)ccounting rules are why Buffett advises investors to ignore gains and losses on investments and derivatives on a quarterly basis. It's more important to focus on the operating earnings and gains in book value and intrinsic value."
OK, so how did that go? Well, Berkshire operating earnings fell 28%. Book value rose 1.7% -- this during one of the greatest bull markets in decades.
Not great, but certainly a lot better than the traditional measures: a 58% profit decline to $1.51 billion, due, in part, to $1.67 billion in losses on the insurance side of the business from catastrophes, including Australian floods and Japanese disasters.
It's the last part Berkshire investors should notice. Buffett and Berkshire have been consistent in their belief that investors should view financial results without investment gains or losses. But in the first quarter, though all the hay was made on the $506 million Berkshire was forced to write down, the underlying losses in the insurance business are what crushed the results.
Moreover, Berkshire has a way of soft-pedaling big losses on its investments. For instance, Berkshire lost $7.5 billion on its investments and derivatives portfolio in 2008. Berkshire and Buffett were quick to underscore that the losses were "unrealized." Yet shareholder book value fell 9.8% that year.
Good old intrinsic value recovered the next year, but the stock has been a laggard. It's up only 25% during the past two years, compared with close to 45% for the Standard & Poor's 500 Index ($INX) and the Dow Jones Industrial Average ($INDU).
And isn't that, in the end, the real problem with Buffett's rose-colored glasses? For all of his rationalizations about how his company should be valued and why his investments in Burlington Northern Santa Fe and Lubrizol (LZ, news) are such great deals, the reality is that no one seems to want to buy the stock considering "all aspects of the business in terms of both tangible and intangible factors."
They want profit growth.
Moreover, isn't it a little bit bizarre that Buffett, who famously railed against Wall Street, wants his business to be measured by the same standards big banks do?
Investors "have lost more than $500 billion in just the four largest financial fiascos of the last two years," Buffett wrote last year. "To say these owners have been 'bailed out' is to make a mockery of the term."
Yet those bailouts would not have been necessary, or at least as big, if big banks were able to mark their own assets not to what the market would pay for them but for what they felt their "intangible" or "intrinsic" value was.
It's this kind of fuzzy financial reporting -- a kind of do-it-yourself valuation -- that makes Berkshire and Buffett's talk hard to take.
Buffett, after all, is the one who attacked Wall Street CEOs for being "reckless" but invested $10 billion in Goldman Sachs Group (GS, news).
Berkshire's latest results underscore the point. It's one thing to say it's sunny and warm, another to do it when your investors have been soaked.
Warren Buffet never loses because he does his homework, does not follow the crowd, avoids bubbles and hype (technology) and has the patience to invest regardless of the short term crisis hysterics generated by the markets and world news.
