Berkshire Hathaway Posts its Worst First Half in 18 Years

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(Image credit: 4mercury.com)

This holiday week, bad news is piling up like (__insert fecal reference__). Starbucks is firing people. Congress is taking a week-long vacation while everyone else scampers for overtime.

And Warren Buffett is posting his worst first half since 1990.

According to Bloomberg:

Berkshire declined $250 to $119,850 at 9:58 a.m. in New York Stock Exchange composite trading, and is down more than 19 percent since its all-time closing high of $149,200 on Dec. 10. That exceeds the 15 percent slide of the S&P 500 in the same period.

Buffett says the U.S. is mired in “stagflation,” a period of slowing economic growth and accelerating inflation.

“We’re right in the middle of it,” Buffett said in a June 25 interview. “I think the `flation’ part will heat up, and I think the `stag’ part will get worse.”

Why the drop? Berkshire makes roughly half of its income off insurance units such as wholly-owned National Indemnity and Geico. Price competition in this sector drove down revenue. In addition, U.S. Bancorp, Wells Fargo & Co., and American Express, three of BH’s biggest equity holdings, posted losses. AmEx and U.S. Bancorp fell 14% in Q2; Wells Fargo fell 18%.

Put in context, however, BH’s bad half doesn’t mean much. Berkshire has gained three times the return of the S&P 500 since 1988, and increased 26-fold in NYSE trading. A $500 million investment in PetroChina Co. made Buffett $3.5 billion last year.* His insurance companies made a buck selling storm coverage for storms that never showed up (they waited until 2008).

Buffett can outperform the economy in the long run, but he can’t out-trend it in the short run. If there’s any definitive proof we’re riding the back of a bear, this is it.

So what’s next for Buffett? Bond insurance:

Buffett entered the bond insurance business in December as the largest companies in the industry, MBIA Inc. and Ambac Financial Group Inc., struggled to maintain their credit ratings. CIT Group Inc., the lender that lost 84 percent of its market value in 12 months, said yesterday that a Berkshire subsidiary agreed to pay $300 million for its portfolio of loans backing factory-built homes.

Talk about adaptive investing. Buffett made money on insuring nonexistent storms. Now that storms have hit, he’s investing in manufactured homes.

Bad half or not, the man remains worth watching.

*Buffett divested all of his PetroChina shares towards the end of 2007. Profiting off a genocide, it turns out, is seriously bad karma.

  • WOW! You know the country is in the crapper when Warren can’t get it right!

  • This bodes dangerous for a lot of value-oriented investors. Although most of us don’t own shares in BRK, the mutual funds we own certainly do. If you’re invested in funds like Fairholme, American Funds, Cascade Investment, or Sequoia Funds, you’re surely feeling a pinch.

    As far as Warren getting it right or not – in his latest report he told his investors that the good times are ending, and insurance profit will definitely be decreasing. So to our friend Robert Barr – he seems like he’s getting it exactly right.

  • Let’s review:

    “Why the drop? Berkshire makes roughly half of its income off insurance units such as wholly-owned National Indemnity and Geico. Price competition in this sector drove down revenue. In addition, U.S. Bancorp, Wells Fargo & Co., and American Express, three of BH’s biggest equity holdings, posted losses. AmEx and U.S. Bancorp fell 14% in Q2; Wells Fargo fell 18%.”

    This is getting it right? Let’s see;

    No excuse for the competition issue, I see that friggin’ gecko everywhere, not my fault it doesn’t convert.

    If he owns stocks in the worst performing sector in the U.S. economy, that’s not getting it right.

    “pay $300 million for a portfolio of loans backing factory-built homes”

    -that’s French for mobile homes right? The kind that get sucked up in a tornado or blown away in hurricanes? That’s just not getting it right that didn’t happen yet!

    Don’t get me wrong investmentplayground, Warren is a rock star no doubt, but the title of the post was “Berkshire Hathaway Posts its Worst First Half in 18 Years” so it wasn’t going to be good ;)

  • RB – good points. Forgive me for taking a Warren comment personally! But mapping out Berkshire’s earnings and shareholder return on a long-term scale still outperforms the S&P by far, as the article says. And looking at just one period of six months probably isn’t going to give a good indicator of the company’s long-term health, Warren’s investment ability, nor of the general economy. As long as he’s outperforming the market. From what I understand – in all but one year of Berkshire’s existence, Warren has made positive income. And even in that one year (2002 I believe), he still outperformed the market.

  • InvestmentPlayground-
    I agree 100%. I would give my money to Warren any day of the week. In fact, funny investment story. It’s about 1989-90, looking at 2 companies; one little piss ant insurance outfit BH, and Midway Airlines. BH was at %5,000 and Midway was at $13 a share.

    I went with the airline. 2 years later the airline went bankrupt and BH was at $65000. The rest as they say, is history. That’s one of the reasons I have an X wife. :)