Warren Buffett's letter to shareholders: Big losses, a buyback boom and the US budget deficit

If Kraft, among Berkshire's biggest holdings, fails to revive its business, Warren Buffett's reputation as a savvy investor could take a hit.
If Kraft, among Berkshire's biggest holdings, fails to revive its business, Warren Buffett's reputation as a savvy investor could take a hit.PHOTO: AFP

NEW YORK (NYTIMES) - The stock market rout that occurred at the end of last year hurt Berkshire Hathaway's 2018 profits, at least on paper.

The conglomerate controlled by Mr Warren Buffett suffered losses of US$25.4 billion ($34.4 billion) in the fourth quarter, according to Berkshire's annual report, which was released on Saturday (Feb 23).

The company owns US$173 billion of stocks and the market's swoon in the fourth quarter helped cause losses of US$22.7 billion on those securities.

Berkshire also recorded a US$3 billion non-cash loss related to its large stake in Kraft Heinz, the struggling food company.

In his annual letter to Berkshire's shareholders that accompanied its results, Mr Buffett urged investors to focus on the performance of Berkshire Hathaway's broad array of companies, which includes insurers, energy firms, railways and manufacturers.

These firms did well last year, posting a 36 per cent increase in earnings.

Problems at Kraft Heinz, which last Thursday reported weak fourth-quarter earnings and a US$15.4 billion write-down, also weighed on Berkshire, which owns a nearly 27 per cent stake in the food company.

If Kraft, among Berkshire's biggest holdings, fails to revive its business, Mr Buffett's reputation as a savvy investor could take a hit.

His partner in the food maker, a Brazilian investment firm called 3G Capital, has pursued a strict cost-cutting strategy that may now be showing diminishing returns.

Berkshire joined the buyback boom last year, modestly.

The company bought back US$418 million of its own shares during the final three months of 2018, bringing its total for the year to just over US$1.3 billion.

That activity will probably continue.

Mr Buffett also seems to have become more relaxed about the federal budget deficit, which has recently been getting bigger.

In the 2018 annual report, he wrote: "Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country's national debt has increased roughly 400-fold during the last of my 77-year periods."

Investors buying to try and protect themselves from the rising debt and the prospect of ballooning deficits would have made a mere fraction of what they would have earned in the US stock market over the 77-year period, Mr Buffett noted.

"The magical metal was no match for the American mettle," he said in the report.