Berkshire Hathaway profits soar but Warren Buffett laments lack of good deals

Warren Buffett on Saturday lamented the lack of attractive investment available for his massive $713 billion conglomerate Berkshire Hathaway, warning that low interest rates over the past two years have inflated valuations across financial markets.

Reflections, in the long-awaited Buffett annual letter, accompanying results showed Berkshire’s operating profit rose 45 percent from a year earlier to $7.3 billion in the final three months of the year. The gains were driven by strong results from BNSF Rail and its electric utility chain.

Buffett, 91, told Berkshire investors that he and his right-hand man, Charlie Munger, had found “a little that excites us” as they searched for investments into which to funnel some of the group’s $146.7 billion in cash.

“Charlie and I have held similar positions in terms of cash from time to time in the past,” he said. “These periods are never pleasant; nor are they ever permanent. Fortunately, we had a fairly attractive alternative during 2020 and 2021 to distribute the capital.”

Buffett, who has been criticized for not using more of the company’s available cash to buy companies to add to its portfolio, has instead turned aggressively to buy back Berkshire stocks. The company spent $27.1 billion on stock buybacks last year, and Buffett indicated in his letter that it had already bought another $1.2 billion of Berkshire stock in 2022.

The view from the investment industry’s dean comes after three turbulent months in financial markets, with investors dumping shares of losing companies as they race to get out of the riskiest corners of the stock market.

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Before I speak any less politely, Buffett said, I’d like to say that bull markets breed bulging bulls.

The moves in the stock market were largely driven by Shift from the Federal ReserveWhich is preparing to raise interest rates for the first time since 2018, as it works to tame inflation and curb the excesses it sees in the markets.

“Low long-term interest rates push up the prices of all productive investments, whether they are stocks, apartments, farms, oil wells, or whatever,” Buffett wrote. “There are other factors that affect valuations as well, but interest rates are always going to matter.”

Line graph shows performance since the start of 2020 (%) After years of broad market tracking, Berkshire regains the lead

Market conditions are beginning to favor old industrial conglomerates, financial giants, energy and utilities giants – all of Berkshire’s lines of business. The company’s stock has advanced 6.4 percent so far this year, well ahead of the 8 percent decline by the Standard & Poor’s 500.

Many of the abuses that Buffett and Munger have warned of in recent years It started leaking from the market. Financial Times calculations showed that the company average in the Russell 3000, which captures US companies both large and small, is down more than 30 percent from 52-week highs.

Data from Finra, the Wall Street watchdog, also suggests that some of the speculation that dominated trading activity in 2021 was pale, pale. The amount of borrowed money used to fund equity positions has fallen by more than a tenth since October.

“People who are comfortable with their investments will, on average, do better than those motivated by ever-changing headlines, gossip and promises,” Buffett said.

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Buffett’s long-term strategy has attracted legions of devotees over the years, who have read his annual letter for investment advice and listened to his perspective on world events.

The company’s annual report, also released on Saturday, showed that the company added a few new positions to its $351 billion stock portfolio and was instead a net seller of the shares. Berkshire spent $8.4 billion in 2021 on stock purchases. By contrast, it sold $15.8 billion worth of shares.

Column chart of net profit, by line of business ($ billion) showing Berkshire's earnings rising along with the economic recovery of the United States

However, many of the companies operating in Berkshire, which include ice cream provider Dairy Queen, insurance company Geico, and aircraft operator NetJets, have had a banner year.

Full-year net income more than doubled from the prior year to $89.8 billion, or $59,460 per Class A share, a result that included significant gains from the appreciation of its stock holdings. Buffett has long said that the overall profit figure that Berkshire must report, which is affected by fluctuations in the stock market, is generally “meaningless.”

Instead, focus on the operating profit generated by the individual divisions of the company. BNSF reported a 16 percent profit jump to nearly $6 billion, driven by higher shipments of consumer and industrial goods and coal via its rail line. Revenues for the unit, which Buffett described in his letter as Berkshire’s “most significant acquisition”, are roughly back to pre-pandemic levels.

The company’s results are often seen as a barometer of the broader US economy, given the hundreds of subsidiaries it owns that operate in remote industries. Sales rose at its facilities, as well as in the manufacturing, retail and homebuilding businesses.

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Buffett also provided space in the annual report of Greg Appel, the person named by the Board of Directors to be his eventual successor, to detail how Berkshire plans to deal with sustainability at the group. This year the company listed climate change as a risk factor for its business.

Abel said efforts have focused on Berkshire Hathaway Energy, where the company invests in solar and wind projects, and BNSF.

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