Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., gestures during a television interview (Photographer: Chris Goodney/Bloomberg)

Buffett's Stock Losses and Key Takeaways From Berkshire Results

(Bloomberg) -- Judging how Warren Buffett’s Berkshire Hathaway Inc. ended 2018 very much depended on one’s preferred metric.

The company posted a staggering net loss of $25 billion in the fourth quarter, the biggest loss in its history. That was largely due to a new accounting rule that Buffett disagrees with, which requires companies to report changes in the value of investments as part of earnings. For most corporations, that’s a relatively minor figure, but Berkshire’s $170 billion stock portfolio means big gains and losses each quarter.

Buffett's Stock Losses and Key Takeaways From Berkshire Results

The firm’s operating earnings, meanwhile, soared 71 percent from a year earlier. That’s Buffett’s preferred metric because it excludes stock swings and measures how Berkshire’s underlying businesses are performing. Those units benefited from better insurance results, gains at the company’s railroad and a lower corporate tax rate.

Here are more takeaways from the results and the billionaire investor’s annual letter to shareholders:

Buffett Hopes for an “Elephant-Sized Acquisition”

Warren Buffett is on the lookout for his next purchase as his cash pile rose to $112 billion. He dismissed immediate prospects for a deal due to “sky-high” prices. Berkshire has not had a major acquisition in more than three years, and instead has used its cash to buy back about $1.3 billion of its own shares in 2018 and snap up stocks of other companies.

Buffett's Stock Losses and Key Takeaways From Berkshire Results

The cash has been a drag on Berkshire’s ability to return more than the broader market. While the company’s book value has increased at almost twice the rate of the S&P 500 during his career, it has actually trailed the index over the last decade. Buffett said he’d be retiring the metric from his annual letter because it has lost relevance.

Buffett's Stock Losses and Key Takeaways From Berkshire Results

Buffett Argues Berkshire Is Better Together

Although Buffett didn’t disclose hints of his successor in the letter, he did answer some questions about the kind of company that he would ultimately pass on. Berkshire’s chairman wrote the conglomerate should be viewed as a “forest” with five different groves, as part of his case for keeping the businesses together. The combined entity can easily allocate huge amounts of capital, obtain low-cost funding, reap tax efficiencies and minimize some risks and costs, he wrote in the letter.

Berkshire Takes a Hit From Stock Portfolio

The period featured $27.6 billion in investment losses for Berkshire as U.S. stocks had their worst quarter in more than seven years. Apple Inc., the conglomerate’s biggest equity bet, dropped 30 percent in the three months.

Berkshire’s fourth-quarter net loss was also widened by a $2.7 billion hit to its stake in Kraft Heinz Co., which announced late Thursday a $15.4 billion writedown to its assets, including the value of some of its most prominent brand names.

More Stock Purchases Are Coming

The lack of big acquisitions led Berkshire to add $24 billion to its stock portfolio last year. And Buffett said that “the disappointing reality” that prices are expensive for deals means Berkshire will probably be buying more stocks in 2019.

“In recent years, the sensible course for us to follow has been clear: Many stocks have offered far more for our money than we could obtain by purchasing businesses in their entirety,” Buffett wrote.

Despite the big losses on its stock portfolio in the quarter, Berkshire is still ahead on most of its biggest bets, including Apple. Among the largest stakes, the only one where the company is below its purchase cost is JPMorgan Chase & Co., a position Berkshire entered last year.

Buffett's Stock Losses and Key Takeaways From Berkshire Results

Berkshire’s Businesses Rise Above

Berkshire’s operating companies showed strong performance, driven by higher earnings in its railroad and energy businesses and a lower corporate tax rate. Profit generated from all the units jumped by 71 percent in the year, and the insurance businesses rebounded from a $2.2 billion underwriting loss in 2017.

Buffett used his letter to single out Tony Nicely, Geico’s long-time chief executive officer who quietly stepped down last year. “By my estimate, Tony’s management of Geico has increased Berkshire’s intrinsic value by more than $50 billion,” Buffett wrote in Saturday’s letter.

©2019 Bloomberg L.P.