Warren Buffett blasted earnings manipulation as “disgusting” and “one of the shames of capitalism.”
Bosses have used restructuring charges, asset sales, and revaluations to hit Wall Street’s numbers.
Former GE CEO Jack Welch specialized in using legal but creative accounting to beat forecasts.
Warren Buffett’s luck changed this year, allowing him to spend a record sum on stocks and end his deal drought. Here are his 6 highlights of 2022.
Warren Buffett spent a record sum on stocks and made a major acquisition in 2022.
The Berkshire Hathaway CEO tore into bitcoin, adjusted some overseas bets, and gave a surprise gift.
Here are the investing icon’s 6 highlights of 2022.
Warren Buffett’s luck changed in 2022. After years of battling to find bargains and watching Berkshire Hathaway‘s cash stack up, the famed investor seized his chance to put his conglomerate’s mountain of money to work.
Buffett spent a record sum on stocks, executed a major acquisition, and made some striking changes to his overseas bets. He also crowed about four of Berkshire’s key holdings in his yearly letter, trashed bitcoin at the annual shareholders’ meeting, and made a surprise donation to his children’s charities.
Here are Buffett’s 6 highlights from 2022:
The annual letter
Buffett published his famous annual letter to Berkshire shareholders in February.
The investor vented his frustration with Berkshire’s mammoth $144 billion cash pile, blaming a lack of bargains in the stock market. He also celebrated the “Four Giants” among Berkshire’s businesses: insurance, railroads, energy, and its enormous Apple stake.
Moreover, Buffett appeared to respond to criticism of his tax practices by noting Berkshire paid $3.3 billion of federal income tax in 2021 — nearly 1% of all the corporate income taxes collected by the US government that year.
Buffett struck a deal to buy Alleghany for nearly $12 billion in March. Berkshire completed its takeover of the insurer in October, ending a years-long drought on the acquisition front.
The investor showcased his trademark approach to dealmaking, which prizes trust and simplicity. He proposed the merger over dinner with Alleghany’s CEO, who previously ran a Berkshire subsidiary, and the pair formally announced a deal less than two weeks later.
Buffet also refused to budge on the deal terms, and when Alleghany enlisted Goldman Sachs as a financial advisor, he insisted the investment bank’s fee was subtracted from Berkshire’s offer price.
An epic buying spree
Berkshire plowed a net $41 billion into stocks in the first quarter of 2022, setting a new record for its quarterly spending on equities.
Buffett and his team built large stakes in HP, Chevron, Occidental Petroleum, Citigroup, Paramount, and Taiwan Semiconductor in the first nine months of 2022. Berkshire also spent over $5 billion on buybacks and made other sizeable purchases, lifting its spending on stocks and acquisitions for the year to an astounding $70 billion or so.
The annual meeting
Buffett hosted Berkshire’s annual shareholder meeting in his hometown of Omaha, Nebraska in April, after two years of virtual gatherings due to the pandemic.
The investor called out the reckless speculation in the stock market, underlined the grave threat posed by inflation, and declared he wouldn’t pay $25 for all the bitcoin in the world.
Buffett made some big moves in 2022 that deserve special attention. For example, he poured a total of about $30 billion into Chevron and Occidental, propelling the pair of oil-and-gas companies onto the list of Berkshire’s most-valuable holdings.
The investor and his team also revealed in November they had boosted their billion-dollar bets on Japan’s five largest trading houses.
In contrast, they sold BYD shares for the first time in 14 years. Berkshire has now slashed its position in the Chinese electric-vehicle maker by around 22%, and pocketed an estimated $1.2 billion profit from the disposals.
An unexpected gift
Buffett made his usual annual donation of Berkshire stock in June, dividing the $4 billion gift between the Bill & Melinda Gates Foundation and four of his family’s charities.
Unexpectedly, he contributed a further $759 million worth of Berkshire stock to his three children’s foundations for Thanksgiving, saying he was proud of their charitable work and wanted to show his appreciation.
7/7 SLIDES
Warren Buffett called out executives who manipulate their companies’ earnings in his latest shareholder letter. Look no further than Jack Welch, the late CEO of General Electric, for insights into the legal but controversial practice.
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Buffett made clear his disdain for so-called creative accounting, branding it “disgusting” and “one of the shames of capitalism” in his yearly missive.
The famed investor and Berkshire Hathaway CEO has previously bemoaned the rise of this type of financial fiddling. He has pinpointed one-off restructuring charges and merger-related adjustments as two common ways to massage figures and mislead investors.
“Clearly the attitude of disrespect that many executives have today for accurate reporting is a business disgrace,” he said in his 1998 letter.
A key issue is that many US companies report at least two sets of earnings. One complies with generally accepted accounting principles (GAAP), while others purport to show their underlying performance.
Even Buffett dismisses GAAP earnings as largely meaningless for Berkshire, as they include unrealized gains and losses in the conglomerate’s roughly $300 billion stock portfolio, which cause huge swings in headline profits. He directs shareholders to focus on the company’s operating earnings instead.
Welch went a step further. He made it his mission to beat Wall Street’s forecasts, and deliver slow, steady growth that would secure a higher valuation for GE stock. He oversaw 40 quarters, or 10 years, of uninterrupted earnings growth during the 1980s and early 1990s.
“If he told research analysts GE was going to earn a certain amount of money in a given quarter, come hell or high water GE was going to earn that amount of money,” author Bill Cohan writes in “Power Failure: The Rise and Fall of an American Icon.”
The ace in Welch’s hand was GE Capital. The conglomerate’s financing arm owned around $200 billion of assets, ranging from commercial buildings and leased jets to stock warrants, that it could sell at short notice to offset weakness elsewhere in the company.
GE also incurred $4 billion of restructuring charges between 1983 and 1994, Cohan reported. Moreover, it once offset a $1.4 billion gain from selling its aerospace business by incurring a $1 billion charge for the cost of closing its global facilities. The resulting after-tax gain and loss were both $678 million, canceling each other out.
The utilities titan also adjusted the expected rate of return from its pension portfolio, and tweaked the values of assets it acquired. In a similar vein, it once pulled out $2 billion from the reserves of its insurance subsidiary to avoid reporting an earnings decline, Cohan said.
The goal was to smooth GE’s earnings by offsetting any big quarterly gains that would be hard to top in the future, and making up for any significant losses by liquidating assets, tweaking valuations, and moving money around.
However, Welch rejected claims that he “managed earnings,” framing his accounting tweaks as simply sensible.
“I’m not manipulating earnings,” he told Cohan. “You have to be an idiot to miss a Wall Street estimate.”
“I had forty businesses,” he continued. “If I can’t get a penny here or a penny there for a shortfall, then I’m an idiot … Everybody’s got a kitty in every level in every company.”
“Staying up all night, fooling with the balance sheet. We didn’t do that,” he added.
Welch’s obsession with GE hitting its numbers each quarter spurred him to ruthlessly cut costs and fire workers as needed. His nickname was “Neutron Jack” because, like a neutron bomb, he could empty an entire building of people but leave the structure standing.
Buffett and Welch clearly differed on what constitutes appropriate accounting, with the Berkshire chief — and one-time GE investor — taking a much more conservative view than the former GE boss. Yet Welch’s protests suggest he didn’t believe he was crossing the line and engaging in “disgusting” or shameful activities.
