"Buffett's 5 Trillion Deficit" is half fake? Challenging the accounting tricks.
Hello, this is Gesan Yamamoto.
"State of Emergency" has been extended by one month
and one week has passed.
As expected, at this rate the Japanese economy is in trouble,
and the steering toward gradually easing it seems to be turning in that direction,
but…
The fight against the coronavirus itself
is likely to become long-term, without a doubt.
A world that no one could have imagined
may await us even further.
And amid all this, the world-renowned investor
Warren Buffett
has shown that he misjudged the threat of COVID-19, and incurred losses.
This has become clear.
For Buffett, who believed that globalization would make the future of airlines bright,
airline-related stocks were
one of his biggest favorites.
Even at the end of February’s stock price drop,
he increased his holdings in Delta Air Lines stock.
At that time,
"In the long run, stock prices will recover, so now is the time to buy,"
he presumably judged.
However, afterward,
seeing the drastic drop in air travel due to the coronavirus,
Buffet
sold all of his airline-related holdings,
and cut losses.
"I intend to hold forever"
is famous for their long-term mindset, so this is an extremely unusual move.
Even Buffett himself seems to have
lost confidence in the future of airlines this time.
Furthermore, Berkshire Hathaway, the investment company led by Buffett,
recently announced
the fiscal results for January–March 2020
showing a net loss of $49.7 billion (about 5.3 trillion yen).
This is Berkshire’s biggest-ever loss.
Some commentators have said
"Buffett is old now, his investing prowess must be waning,"
and so on.
Indeed, Buffett is almost 90 years old.
Just being in good health at his age is remarkable, and it wouldn’t be surprising if his cognitive abilities were to decline.
But, is Buffett’s ability really fading?
From my perspective,
it would be rash to conclude that Buffett has finally declined.
For example, a figure like the 5 trillion yen alone can be misleading without the details being explained.
Many articles do not properly convey the specifics,
and Buffett’s statements may not reach the public properly.
So today, I would like to introduce
some words from Buffett that may not have reached everyone.
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Read the fine print
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No matter what news you read, the full story is not always told.
Usually only a fragment is reported.
Therefore, to obtain more accurate information,
you should examine the primary sources.
Although I cannot read every piece of information in full...
to obtain reliable information and to avoid being swayed by the news,
you should also review the original materials that form the basis.
The sources for Buffett-related news I’ve introduced are here.
BERKSHIRE HATHAWAY INC. ‘News Release’
↓
https://www.berkshirehathaway.com/news/may0220.pdf
BERKSHIRE HATHAWAY INC. ‘Quarterly Report’
↓
https://www.berkshirehathaway.com/qtrly/1stqtr20.pdf
It’s in English, and the figures are in dollars, which can be hard to grasp,
so many people may not feel like reading it.
So, one thing only, the most important message,
from the "News Release" will be introduced.
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The amount of investment gains/losses
in any given quarter is usually meaningless
and delivers figures for
net earnings per share
that can be extremely misleading
to investors who have little or
no knowledge of accounting rules.
BERKSHIRE HATHAWAY INC. ‘News Release’
https://www.berkshirehathaway.com/news/may0220.pdf
Quoted from page 1
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In rough translation,
“Quarterly profits or losses are meaningless,
and for investors who have little knowledge of accounting rules,
or have none, they can mislead.”
This is what it says.
Why is there no meaning to quarterly profits or losses?
Perhaps it is Buffett’s sore spot?
Of course not.
Currently Berkshire, in the United States,
follows new accounting standards applicable since fiscal year starting December 2017,
and reports its results accordingly.
These are the GAAP standards.
Generally Accepted Accounting Principles
The abbreviation means,
“principles generally accepted as fair and appropriate.”
Under these principles,
unsettled gains and losses must be recorded.
Therefore, in environments with sharp stock price volatility like recently,
timing can cause unrealized gains or losses to swing the reported profits greatly.
And the larger the amount, the more shocking it becomes in the eyes of the media,
and the numbers can lead investors to incorrect judgments,
which Buffett fears.
Indeed, this time too, the inflated number from unrealized losses
appears to have gone wandering on its own.
The figure of 5 trillion yen is not a lie, but it can swing greatly with timing,
and it is also true that it may not reflect reality.
First of all, Buffett is known for holding stocks for long periods.
That is why he does not worry about short-term ups and downs in stock prices,
and investors probably would not want him to.
Of course, Buffett’s views on airline stocks show there are misreads,
and Berkshire Hathaway today also carries substantial unrealized losses.
However, given Buffett’s long-term investment style,
it is unlikely to say that he has declined at this moment.
In summary,
the point I wanted to convey through today’s discussion is
not to be swayed by sensational information,
but to look for accurate information.
When a shocking news story appears, people tend to lose their calm,
but try not to judge things based only on surface information.
Develop the habit of looking beyond the headline.
Well then, please enjoy the rest of today’s content until the end.
Keizo Gesan Yamamoto
