The EconomistFebruary 29th 2020 Business 531O
n february22nd Warren Buffett re-
ported that the conglomerate he runs,
Berkshire Hathaway, earned net income of
$81.4bn in 2019. That makes Berkshire,
America’s biggest non-tech firm by market
value, more profitable than any other com-
pany anywhere bar Saudi Aramco, an oil
giant. Yet after years of mostly level-peg-
ging or outperforming the broader market,
Berkshire’s shares did only one-third as
well as the soaring s&p500 index last year
(see chart). What is going on?
Assessing the conglomerate’s true suc-
cess is a complicated business, because the
business of Berkshire is complicated.
Worse, a change in accounting principles
two years ago forced Berkshire to start
booking changes in the value of its $248bn
equity portfolio as earnings. Last year that
resulted in $53.7bn of unrealised capital
gains filtering through to the bottom line—
and a return on equity of 19%. The year be-
fore hefty unrealised losses meant a return
on equity of just 1%.
The surge in unrealised gains was dri-
ven by the performance of Berkshire’sholdings in giant public companies such as
Apple and Bank of America, which Mr Buf-
fett and his colleagues pick like any old as-
set manager. Last year these stakes did a bit
better than the s&p500 as a whole—chiefly
thanks to an epic big-tech bull run, which
supercharged the returns from Berkshire’s
5.7% stake in the iPhone-maker.
Mr Buffett prefers the “real world” to
“accounting-land”, as he put it in his annu-
al letter, referring to the new standards on
treatment of unrealised gains and losses.
But in recent years he has struggled to artic-
ulate a consistent way of measuring the
firm. At points he has endorsed tracking
book value and at other times “operating
earnings”, a proxy for the cash generated by
the businesses Berkshire owns outright
(plus the dividends from minority stakes).
One way of getting your head round
Berkshire is to split it into two parts: a vola-
tile financial arm, which includes its equ-
ity portfolio and insurance activities, and a
steadier industrial group, composed of un-
listed firms such as bnsf, a railway, and
Precision Castparts, a manufacturer. The
second category are the sort of company
the no-nonsense Nebraskan professes to
understand, and has spent a decade buying
up. Their weight in Berkshire’s portfolio
has grown: the industrial arm now makes
up roughly half of total assets, up from a
third a decade ago. But Mr Buffett paid up to
acquire these firms, leaving the industrial
arm’s return on equity at about 8%. Not ter-
rible—but nothing to write home about. 7NEW YORK
Untangling Warren Buffett’s unique
firm—and its mediocre performanceBerkshire HathawayHow hath
Berkshire done?
*ToFebruary25thWarren’s warrenSources:DatastreamfromRefinitiv;companyreports;Bloomberg;TheEconomistTotal returns, %BerkshireHathaway BerkshireHathawayDecember31st2018=100-20-100102030402010 11 12 13 14 15 16 17 18 19Berkshire Hathaway S&P 5002018 201990100110120130140150
Berkshire Hathaway
equity holdings valueS&P 500 index
Berkshire Hathaway
holdings value excl. Apple10
8
6
4
2
050
40
30
20
10
0
2003 05 10 15 19Industrial assets
% of totalReturn on equity
Industrial business, %2000 05 10 15 20*0100200300400500020406080100“A” shares held by
Warren Buffett, ’000Market value of Buffett’s
“A” shares, $bn“I
would always say to regulators,
‘Look, bad things happen in human
society, therefore bad things happen on Fa-
cebook’.” So said Chris Kelly, an ex-Face-
booker once in charge of the social net-
work’s privacy policies, to Steven Levy, a
veteran technology journalist whose book
about Facebook was published on February
25th. Mr Kelly was recounting conversa-
tions with officials in 2007, amid early
rumblings about Facebook’s seamier side—
specifically the ease with which children
could find questionable content, such as a
group named “I’m Curious About Incest”.
More than a decade on, Facebook claims
2.5bn people—a third of humanity—as us-
ers. The charge sheet against the company
has grown as well. It has been accused of
spreading fake news, facilitating paedo-
philia, and allowing countries to interfere
in each other’s elections. Mr Levy’s book of-
fers a ringside view of the growth of one of
the world’s biggest companies, and of the
backlash it has provoked. Other books, and
even a Hollywood film, have chronicled the
firm’s rise. But Mr Levy’s effort is fresh, up-
to-date and insiderish. Thanks to the in-
dulgence of the firm’s boss, Mark Zucker-
berg, he had the run of its California head-
quarters and its denizens.
Such access can be a reporter’s blessing.
It has long been apparent from the outside
that Facebook grew so quickly that its em-
ployees had little time to grapple with all
the implications, even those that would be-
come central to the business. But it is still
noteworthy to hear interviewees confirm
as much to Mr Levy in their own words.
Carolyn Everson, an advertising executive
at Microsoft, was poached to head advertis-
ing sales at Facebook in 2011. Ms Everson
assumed that her new employer knew
what it was doing—after all, it was already
raking in hundreds of millions of dollars.
She was quickly disabused of that notion:
“[Facebook] didn’t have everything figured
out...everything was brand-new and [they
were] still building.”
In 2008 Mr Zuckerberg hired Sheryl
Sandberg, a Google executive, to be Face-
book’s chief operating officer, handing off
responsibility for everything not directly
related to building Facebook’s product. (It
would take him a decade, writes Mr Levy, to
realise that such a division of labour was a
mistake.) Facebook’s board upbraided both
of them for not spotting a Russian misin-Social networksA friendly portrait
Facebook: The Inside Story.By Steven
Levy. Blue Rider Press, 583 pages