Disciples of Omaha’s most famous granddad will be pleased to know that during the second quarter, Warren Buffett managed to avoid the kind of Nebraska-sized paper loss logged during the first three months of 2020, when Berkshire Hathaway’s net income plunged almost $50 billion.
That mind-boggling drop was, of course, attributable to losses in Berkshire’s colossal stock portfolio, which suffered mightily as equities abruptly tumbled into a bear market amid the pandemic panic.
In Q2, net income soared 87% to $26.3 billion alongside the recovery in stocks.
That’s the good news. The less-good news is that second quarter results show Berkshire reporting a 10% drop in operating income (to $5.51 billion from $6.14 billion), Buffett’s preferred measure of performance.
“Our operating business groups are preparing for reduced cash flows from reduced revenues and economic activity as a result of COVID-19”, Berkshire’s Saturday filing reads. “We are taking measures to reduce costs as appropriate [and] currently believe our liquidity and capital strength, which is extremely strong, to be more than adequate”.
Buffett’s cash hoard surged more than $9 billion for the second straight quarter. Some of the increase was presumably attributable to the sale of airline stocks.
“During the second quarter we received approximately $12.8 billion from the sales of equity securities, net of the costs of equity securities purchased”, the conglomerate said.
While Buffett was selling shares of other companies, he was investing in himself — that will surely be the the headline from Berkshire’s second quarter results.
Specifically, Buffett repurchased $5.1 billion of Berkshire shares during the period. That’s a record, and it’s not even close.
The increase in buybacks came over a quarter during which Berkshire underperformed the broader market by massive margin (red bar in the figure above).
Commenting on the operating environment, Berkshire flatly notes that “epidemics, pandemics or other outbreaks, including COVID-19, could hurt our operating businesses”.
It’s hard to argue with that.
Below, find some additional color (although “color” is probably the wrong word — it’s pretty dry):
The outbreak of COVID-19 has adversely affected, and in the future it or other epidemics, pandemics or outbreaks may adversely affect, our operations, including our equity securities portfolio. This is or may be due to closures or restrictions requested or mandated by governmental authorities, disruption to supply chains and workforce, reduction of demand for our products and services, credit losses when customers and other counterparties fail to satisfy their obligations to us, and volatility in global equity securities markets, among other factors. We share most of these risks with all businesses.
On the bright side, insurance underwriting profits surged 128% YoY thanks (I suppose) to less accidents, as drivers eschewed the open road for their couches.
Spoiler alert: that’s not sustainable. Especially not once the cost of charity is realized. “These results are likely to be temporary, as the full effects of the reductions in premiums from the GEICO Giveback program in underwriting earnings will occur over the remainder of 2020 and the first quarter of 2021 when the reduced levels of premiums written under the program are earned and included in our reported revenues”, Berkshire says. “To the extent claims frequencies over this period revert to historical levels, GEICO may incur underwriting losses”.