Warren Buffett Says Berkshire Hathaway’s $23 Billion Loss Is an Accounting Fiction

The accounting principles behind Berkshire Hathaway's bruising 2022 earnings are "100% misleading," Warren Buffett said in his annual letter to shareholders.

Warren Buffett
Warren Buffett’s Berkshire Hathaway is the second largest institutional shareholder of Apple. Visual China Group via Getty Ima

Turns out Warren Buffett had a terrible year just like everyone else. His investment conglomerate Berkshire Hathaway (BRK.A) on Feb. 25 reported a net loss of $22.8 billion in 2022, driven by a nearly $54 billion decline in the value of its stock portfolio. But the 92-year-old investment guru said that figure is highly misleading and doesn’t reflect the true state of Berkshire’s financial performance.

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When excluding losses on stock investments, which were unrealized, Berkshire Hathaway actually recorded $30.8 billion in operating earnings in 2022, a record high and 12 percent more than the previous year’s $27.5 billion.

Berkshire Hathaway generates revenue from two pillars of business: subsidiaries it directly owns and control and publicly traded companies it partially owns through equity investment but have no managerial control.

Operating earnings are drawn from businesses directly owned by Berkshire Hathaway, which are concentrated in insurance, railroads and energy sectors, and exclude capital gains or losses from its stock portfolio. However, in the U.S., the Generally Accepted Accounting Principles, or GAAP, require that a company include unrealized capital gains or loses on its equity investments in its total earnings calculation.

In his annual letter to shareholders published on Feb. 25, Buffett said he and Charlie Munger, his longtime business partner, prefer using operating earnings as a measure of financial performance. They urge Berkshire’s shareholders to do the same, Buffett said, because GAAP earnings can fluctuate wildly from one financial period to the next and can mislead investors who have no knowledge of accounting rules.

“The GAAP earnings are 100 percent misleading when viewed quarterly or even annually,” Buffett wrote in the shareholder letter. “Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”

Under GAAP accounting, in 2022 Berkshire earned $112 billion less than the previous year, though Buffett thought it was good year for business, he said in the shareholder letter.

Warren Buffett Says Berkshire Hathaway’s $23 Billion Loss Is an Accounting Fiction