Friday, August 31, 2012

berkshire hathaway: q2 results

The ghosts from Buffett’s derivative investments have returned to haunt Berkshire Hathaway’s report card in the second quarter. It may well be time to give up the portfolio, says Deepak Ranjan Patra

However, what is even more threatening for the company is the amount of unrealised losses it has piled up in its balance sheet. The value of the company’s investments is directly linked to overall market position and the credit situation of company. So with the balance sheet showing unrealised losses of $4.1 billion at the end of June, 2010 as compared to $3.04 billion at the end of December 2009, the situation certainly calls for a reassessment of the company’s situation. Commenting on the financial outlook of the company and his ‘sell’ recommendation on Berkshire’s shares, Meyer Shields, Principal Analyst, Stifel Nicolaus & Company says, “The company’s stock price is not discounted for such a hesitant recovery that we are witnessing. Moreover, the prevailing weak micro-economic outlook means a poor second half for Berkshire’s operating companies.” And the holdings and derivatives products will continue to face depletion in value due to these weak economic conditions. But there are no signs of Buffett disposing off the culprit - the long-term derivatives (aggregate intrinsic value $6.4 billion as on June 30, 2010) business, until it matures.

Global management guru Al Ries once said, “What makes Warren Buffett so effective is the fact that he only participates in businesses he can understand.” Certainly, Buffett’s heavyweight track record is indubitable, but Berkshire’s own derivatives portfolio is the greatest vindication of his WMD hypothesis that can even blow in the face of the one launching them. The string of loss making quarters is self explanatory - $1.41 billion in Q2FY’10, $1.5 billion in Q1FY’09, $1.5 billion in Q3FY’08, $1.6 billion in FY’08 and $122 million in Q3FY’07.

Critics even argue that thanks to his rising predilection for the limelight, Buffett is now too distracted from the real focus that he once had and which made Berkshire what it is. Are we seeing a leader who is looking at derivatives as a personal challenge, rather than looking at them from the perspective of business logic? If that is so, his adventurism is proving too costly for Berkshire shareholders, and a reality check is imminent. And Berkshire’s investors would rather have it sooner rather than later.