As I wrote in this article, Warren Buffett at Berkshire Hathaway (BNI, Financial) lost about $23 billion dollars in the stock market disaster of 2008, or about 30% of the $75 billion stock portfolio that was on his balance sheet and year end of 2007. Readers don’t seem to notice, so I write this separate piece to detail and substantiate my points.
Take a look at the table at the end of this article, at the beginning of 2008, Warren Buffett had $74,999 million dollars of equity investments (stocks) on Berkshire Hathaway’s balance sheet. He spent $10,140 million on purchasing stocks and sold $6,840 million stocks throughout the year; and at the end of the year, he had $49,073.
Warren Buffett would have lost $29,226 million if that is the whole story. But wait, here is so more. On Page 15 of his Chairman’s Letter to Berkshire Hathaway Shareholders, he stated:
So Moody’s (MCO, Financial) and Burlington Northern Santa Fe (BNI) were taken out of the ending balance of equities account because Berkshire’s ownership in them reached more than 20%. We need to add those back. In the following table, I detail the calculation. At the end of 2008, Berkshire would have carried $5,306 million and $964 million of BNI and Moody’s (respectively) if fair market value instead of “equity value” is used.
Adding these two numbers back to the $29,226 loss we reached earlier, we arrived at a total loss in equity of $22,956 million. That is if he sold all stocks at year end 2008, he would have $22,956 million less money than a year ago, tax effect unconsidered.
Instead of use the market value, accounting rules allowed Warren Buffett us the “equity value”, that is the cost plus retained earnings since purchase, minus the tax that would be paid if those earnings were paid to us as dividends. The carrying value of BIN and MCO on the balance sheet is overstated as both stocks were purchased at a higher price
Full calculation of equity value is possible but tedious. Here is where I like Warren Buffett: he discloses. On Page 40 of the annual report, he stated that Berkshire Hathaway’s equity increased by $626 million as compared to the amount that would have been recorded had BNI and MCO continued to be recorded at fair value.
In another words, accounting rules allows Warren Buffett overstated his firm’s book value by $626 million. Without the re-classification, Berkshire’s book value would have dropped $12.1 billion, instead of $11.5 billion, or 10.1% instead of 9.6%.
That is still pretty remarkable.
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Take a look at the table at the end of this article, at the beginning of 2008, Warren Buffett had $74,999 million dollars of equity investments (stocks) on Berkshire Hathaway’s balance sheet. He spent $10,140 million on purchasing stocks and sold $6,840 million stocks throughout the year; and at the end of the year, he had $49,073.
Warren Buffett would have lost $29,226 million if that is the whole story. But wait, here is so more. On Page 15 of his Chairman’s Letter to Berkshire Hathaway Shareholders, he stated:
In addition, we have holdings in Moody’s and Burlington Northern Santa Fe that we now carry at “equity value” – our cost plus retained earnings since our purchase, minus the tax that would be paid if those earnings were paid to us as dividends. This accounting treatment is usually required when ownership of an investee company reaches 20%.
So Moody’s (MCO, Financial) and Burlington Northern Santa Fe (BNI) were taken out of the ending balance of equities account because Berkshire’s ownership in them reached more than 20%. We need to add those back. In the following table, I detail the calculation. At the end of 2008, Berkshire would have carried $5,306 million and $964 million of BNI and Moody’s (respectively) if fair market value instead of “equity value” is used.
Adding these two numbers back to the $29,226 loss we reached earlier, we arrived at a total loss in equity of $22,956 million. That is if he sold all stocks at year end 2008, he would have $22,956 million less money than a year ago, tax effect unconsidered.
Instead of use the market value, accounting rules allowed Warren Buffett us the “equity value”, that is the cost plus retained earnings since purchase, minus the tax that would be paid if those earnings were paid to us as dividends. The carrying value of BIN and MCO on the balance sheet is overstated as both stocks were purchased at a higher price
Full calculation of equity value is possible but tedious. Here is where I like Warren Buffett: he discloses. On Page 40 of the annual report, he stated that Berkshire Hathaway’s equity increased by $626 million as compared to the amount that would have been recorded had BNI and MCO continued to be recorded at fair value.
In another words, accounting rules allows Warren Buffett overstated his firm’s book value by $626 million. Without the re-classification, Berkshire’s book value would have dropped $12.1 billion, instead of $11.5 billion, or 10.1% instead of 9.6%.
That is still pretty remarkable.
| Berkshire Hathaway 2008 Equity Investment Account Reconciliation | |||
| Account | Amount (M$) | ||
| Beginning Balance | 74,999 | ||
| Stocks Purchased | 10,140 | ||
| Stocks Sold | 6,840 | ||
| End Balance | 49,073 | ||
| Loss before reclassification | -29,226 | ||
| Add Back Reclassified Stocks | Shares | Price | |
| BNI | 5,306 | 70,089,029 | 75.7 |
| Moody’s | 964 | 48,000,000 | 20.09 |
| Total Gain (Loss) | (22,956) | ||
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