Warren Buffett probably didn't sweat Berkshire's $10B one-day Apple "loss"

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FRI, JAN 04, 2019

WARREN BUFFETT WATCH
 

Apple's big drop may have been an opportunity for Buffett

 

If you owned almost $40 billion worth of a company's stock, you probably wouldn't be happy if it dropped 10% in just one day.

 

That's what happened to Warren Buffett's Berkshire Hathaway on Thursday, after a revenue warning from Apple after Wednesday's close sent that company's shares sharply lower.

 

As of September 30, Berkshire owned 252.5 million Apple shares. Assuming it still has a stake in that vicinity, it's Berkshire's biggest single stock investment by market value.

 

At Wednesday's close, it was worth almost $40 billion.  Twenty-four hours later the shares were worth $35.9 billion, a drop of just under $4 billion. (Apple shares rebounded by 4.3% on Friday, cutting the two-day drop to $2.4 billion.)

At least one headline called Thursday a "very bad" day for Buffett. And the drop comes after big declines for stocks in the fourth quarter that reduced Berkshire's book value by 8.2%, by one analyst's estimate. That will probably push Berkshire's net income into the red when its Q4 report comes out next month, because a new accounting rule mandates the inclusion of unrealized investment losses (and gains) in quarterly results.

 

The word "unrealized," however, is important. The losses in the fourth quarter, and on Thursday, are on "paper" unless a stock is actually sold, and Buffett does a lot more buying than selling.

 

In his annual letter to shareholders last February, he warned the new rule would "severely distort" the net income numbers. For years, Buffett had telling investors to ignore net income because it included realized gains and losses that "fluctuate randomly." Including unrealized gains, he wrote, will make Berkshire's bottom line even more "useless." Instead, he urged, look at the operating earnings of Berkshire's subsidiary companies.

 

(Buffett also addressed the issue at the 2018 annual meeting and in a CNBC interview.)

 

So Buffett was probably not all that sad about Apple's 10% drop, just as he probably wasn't wildly celebrating its gains earlier this year. 

 

As Forbes writer Antoine Gara points out, "It's easier to lose billions on paper when you don't brag about making billions beforehand."

 

It's more likely that Buffett was happy that Apple dropped. In a September interview on CNBC, he said he bought just a "little bit" of the stock since the end of June, as the stock was hitting all-time highs. "I like to buy them cheaper... I'd rather have it go down."

 

A drop would also help because Apple would buy back more of its stock. "If it goes down 10%, it means they get to buy 10% more shares, and my interest will go up 10% more... So I am benefited by it going down. If I were to talk my book, I would talk it down."  

BUFFETT AROUND THE INTERNET

 
 
  • Bloomberg Opinion columnist Bruce Chappatta suggests Buffett may be sending the bond market a signal about the future of interest rates as Berkshire sells 30-year fixed-rate bonds to refinance almost a billion dollars worth of floating-rate notes. 

 

  • In his blog, Microsoft co-founder Bill Gates writes that when he was in his 20s, all he cared about was work. Now that he's 63, a year-end review includes asking himself if he spent enough time with his family, learned new things, and made new friends. He gives his old friend Warren Buffett some of the credit for broadening his thinking. Buffett's "measure of success is, 'Do the people you care about love you back?' I think that is about as good a metric as you will find."

HIGHLIGHTS FROM THE ARCHIVE

 
 

CNBC's Warren Buffett Archive includes a collection of clips from Berkshire annual meetings over the years that help further explain why Buffett probably welcomed Apple's big stock drop. In "How Buffett looks at stocks," he explains why the stock market's future direction "doesn't make a difference to us," lists the three key principles about investing that he learned from his mentor Benjamin Graham, and urges investors to "forget about the word 'stock.'" 

BERKSHIRE STOCK WATCH

 
 

Berkshire Hathaway Class A shares closed at $292,500 Friday, down 4.9% over the previous four weeks, and down 2.7% from one year ago.

Berkshire Hathaway Class B shares closed at $195.20, down 4.7% over the previous four weeks, and down 2.7% from one year ago.

The benchmark S&P 500 index closed at 2531.94, down 3.8% over the previous four weeks, and down 7.1% from one year ago.

The final tally for 2018: Berkshire A shares were up 2.8%, Berkshire B up 3.0%, and the S&P fell 6.2% 

BERKSHIRE'S TOP STOCK HOLDINGS 

 
 

 

Berkshire's top 10 stock holdings by market value, based on today's closing prices. The number of shares held is as of September 30, 2018, as disclosed in the company's November 14 13-F SEC filing.

 

The full list of holdings and current market values is available from CNBC.com's Berkshire Hathaway Portfolio Tracker.

QUESTIONS OR COMMENTS

 
 

Please send any questions or comments for us to buffett@cnbc.com.

 

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