Berkshire Hathaway, run by billionaire investor Warren Buffett, posted strong earnings for the third quarter at the end of the week. This should give the shares of Berkshire Hathaway their rightful place at beating the market for a trailing five years.
The tough test that Warren Buffett requires of Berkshire Hathaway is that for any trailing five-year period, Berkshire Hathaway shares should outperform the S&P 500 on a total return basis.
Buffett has cleared this hurdle every year since he took over as managing partner of the company back in 1965… That is until last year.
Forget about the vast investment portfolio of Berkshire Hathaway and the lower risk value stocks, which you can expect the portfolio to underperform the market when the market is on an unusually hot streak. Between 2008 and 2013, Berkshire had a 64% return. The S&P 500 had a 90% return during the same time.
But after looking at the third-quarter results and the year-to-date performance, you should have no doubt that Warren Buffett still has it.
For this recent quarter, Berkshire Hathaway’s net profit declined by 9% per Class A share.
A drop in earnings might seem bad, but it was actually driven by incredibly good investment returns just one year ago, when Berkshire Hathaway was able to cash in on loans that it made during the financial crisis in 2008, including the privately held Mars and Wrigley, Goldman Sachs and General Electric.
Berkshire Hathaway Keeps on Chugging
Most importantly to note is that on an operating basis – Buffett’s favorite way to measure Berkshire Hathaway profit – the company rose in profit by $4.7 billion.
As well, the book value per share rose by 7%.
Burlington Northern Santa Fe railroad once again proved to be an excellent bet on the improving US economy. Income rose to $1.04 billion, and this is up from $989 million just one year ago.
Also at the same time, the insurance business at Berkshire Hathaway continues to deliver, and total earnings grew by 30% during the third corner alone. Manufacturing, retail and energy as well as finance also contributed to the company growth.
A rare Berkshire Hathaway misstep in Tesco caused the company to lose $678 million. Warren Buffett calls this investment a “huge mistake.”
It’s also necessary to talk about the huge piles of cash that Berkshire Hathaway has when discussing this company. It has over $60 billion in cash on the books at the end of the third quarter. Buffett says that he only likes to keep around $20 billion sitting in cash as insurance for the insurance companies. That has left Berkshire Hathaway with over $40 billion for future acquisitions.
The bottom line is quite simple… Berkshire Hathaway is crushing the markets, this year and also including the last five years. Year to date, Berkshire Hathaway shares are up 21% when compared to a 10% gain in the S&P 500. And over the last five years, Berkshire is beating the broader market by more than 30%.
Warren Buffett may have stumbled a little bit last year, but with just two months left in 2014, there’s no question that he has not lost a step at all.