ON FEBRUARY 22nd Warren Buffett reported that the conglomerate he runs, Berkshire Hathaway, earned net income of $81.4bn in 2019. That makes Berkshire, America’s biggest non-tech firm by market value, more profitable than any other company anywhere bar Saudi Aramco, an oil giant. Yet after years of mostly level-pegging or outperforming the broader market, Berkshire’s shares did only one-third as well as the soaring S&P 500 index last year (see chart). What is going on?
Assessing the conglomerate’s true success is a complicated business, because the business of Berkshire is complicated. Worse, a change in accounting principles two years ago forced Berkshire to start booking changes in the value of its $248bn equity portfolio as earnings. Last year that resulted in $53.7bn of unrealised capital gains filtering through to the bottom line—and a return on equity of 19%. The year before hefty unrealised losses meant a return on equity of just 1%.
The surge in unrealised gains was driven by the performance of Berkshire’s holdings in giant public companies such as Apple and Bank of America, which Mr Buffett and his colleagues pick like any old asset manager. Last year these stakes did a bit better than the S&P 500 as a whole—chiefly thanks to an epic big-tech bull run, which supercharged the returns from Berkshire’s 5.7...
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