Bertie’s Beer Money
You’re in rarified air as an investor if you’re able to throw shade at the Financial Accounting Standards Board (FASB), Securities & Exchange Commission (SEC), and your auditor without fear of comeuppance. And that’s where Berkshire Hathaway’s Warren Buffett is these days, doing just that in his most recent annual letter in pointing out the pointlessness of reporting GAAP net income.
I previously wondered who generally accepted generally accepted accounting principles (GAAP), and the fact remains that it’s the least worst way of tracking financial performance except for all the others.
Buffett’s gripe with GAAP has to do with its requirement that Berkshire mark its investment portfolio to current “fair” market values on its balance sheet and therefore book corresponding gains or losses on its income statement depending on whether those market values went up or down. This creates massive volatility, with Berkshire reporting a $23B loss in 2022 compared to $96B of profit in 2023, with little to no impact on the company’s operating cash flow since Buffett has no interest in selling his investments.
For Buffett, these numbers are “worse-than-useless,” and I don’t disagree. So then the question becomes what numbers are useful?
In that same letter, Buffett says that his target audience for his letter is his sister Bertie who is “very sensible” and “understands many accounting terms, but…is not ready for a CPA exam.” And he posits that what she would find useful, at least as a starting point, is operating earnings, which is a measure of business performance that throws out those mark-to-market gains and losses and other line items such as interest expense in order to report on how much money Berkshire’s companies are making by opening for business every day.
And while those earnings are more consistent and do a better job of giving someone like Bertie a sense of Berkshire’s viability, I would posit that they are also not that useful in evaluating Berkshire as an enterprise. After all, making successful investments is a huge part of Berkshire’s value proposition, and those investments account for almost half of the company’s $800B balance sheet. To not bother reporting on how they’re doing seems like an oversight and also how they’re doing seems like something Bertie would want to know! Further, Berkshire doesn’t look as good as an investment through the operating earnings lens (trading at 25 times) as it does when one takes the entire balance sheet into account (trading at 1.5 times book value).
The point is numbers, no matter how you slice and dice them, will always be deceiving. Even my hallowed beer money metric falls down when it comes to evaluating Berkshire – after all of its investments, capital expenditures, and payments on debt, the company added just (relatively speaking) $2.2B of cash to its balance sheet in 2023 (sorry, Bertie). But of course much of that reinvestment was discretionary, i.e., it could have been beer money instead. And given Berkshire’s investing track record, foregoing beer money now should mean more beer money in the future.
So where does that leave us? Well, if numbers can always be deceiving, then the only thing we can do is to try to work with people who won’t use them that way. Because what’s the point of beer money if you don’t want to have a beer with the people you earned it with? Cheers.
P.S. Danny didn’t get a glass.
-Tim
