Why Buffett will keep Berkshire Hathaway reporting earnings during the weekend
Warren Buffett’s concern about new accounting rules will keep Berkshire Hathaway reporting its quarterly results during the weekend.
In his recent letter to shareholders, Buffett complained about a new accounting requirement that he believes will “severely distort” Berkshire’s results and potentially “mislead commentators and investors.”
The rule, according to generally accepted accounting principles, the standards all public companies must follow, requires net unrealized investment gains and losses in Berkshire Hathaway’s BRK.A, -0.19% BRK.B, -0.03% portfolio to be included, along with actual gains and losses, in reported earnings each quarter. Buffett says that will produce “truly wild and capricious swings” in Berkshire’s bottom line.
Berkshire holds $170 billion of marketable equities, not including its interest in Kraft Heinz. Berkshire may reports earnings swings of $10 billion or more each quarter, rendering the GAAP bottom-line “useless,” Buffett says.
In his letter, he expressed frustration that reporters could push inflammatory news about Berkshire’s earnings that “highlights figures that unnecessarily frighten or encourage” readers or viewers. He promised that Berkshire will now “take pains every quarter to explain the adjustments you need in order to make sense of our numbers.”
One way he plans to mitigate the perceived threat is to continue his practice of publishing Berkshire’s quarterly and annual results late on Fridays, after the markets close, or early on Saturday mornings. Buffett writes that this approach allows everyone to have maximum time for analysis and gives investment professionals a chance to develop “informed commentary” before the markets open again on Monday.
It’s not clear why Buffett is so concerned. He did not respond to a request to comment further on his strategy to report on Friday nights.
Berkshire Hathaway shareholders are not usually viewed as unsophisticated investors vulnerable to hype. There also aren’t a lot of investors actively trading the shares either, ready to hit sell at the first hint of bad news. Berkshire Hathaway’s “A” shares will set you back more than $300,000 each, the average daily volume is about 400 shares and there’s no dividend. The “B” shares cost a more affordable $200 or so but still no dividend and modest trading volume averaging about 4 million shares a day.
A recent working paper, The Timing of Earnings Announcements and Volatility, found that for the firms that announce on Friday or Saturday, the empirical results seem consistent with Buffett’s objective to give investors more time to adjust. “If this is Buffett’s goal, he seems to have achieved it,” said Matthew Lyle, an associate professor at Northwestern University’s Kellogg School of Management, one of the co-authors. “Our recent investigation suggests that there is lower volatility after a Friday or Saturday announcement than for other firms that also announce after trading hours.”
Prior studies found that the percentage of firms like Berkshire Hathaway that actually announce on Fridays is relatively small, about 1.1% and is often argued to be driven by a strategic decision to bury bad news.
Berkshire sticks to the weekend announcement strategy consistently. The company has reported on other than a Friday night or Saturday morning only twice since 2006, according to Wall Street Horizon data.
Berkshire Hathaway rarely delivers bad news, either, but longtime Berkshire Hathaway shareholder Kevin LaCroix noted on his blog D&O Diary, that Buffett’s letter this year was “uncharacteristically short, and included quite a bit of griping, including, for example, a complaint about how new accounting reporting rules will complicate investors’ perspective on the company.”
MarketWatch asked LaCroix which Berkshire Hathaway investors he thought Buffett was worried about when made these remarks and when he promised to continue making earnings announcements on Friday nights/Saturday mornings.
“I am not sure. There is hardly any trading volume minimal options activity. Even if the market or an individual investor did overreact to some unusual investment gain or loss the situation is bound to correct itself quickly.”
A prominent Berkshire Hathaway shareholder who does not discuss the stock publicly told MarketWatch Buffett’s comment could be explained by his commitment to the idea that Berkshire Hathaway shares should be held by long-term investors, not traded.
Buffett might also try to explain these adjustments needed to eliminate the impact of the “truly wild and capricious swings” by backing off on his stated distaste of non-GAAP metrics.
Buffett likes to say others shouldn’t use non-GAAP metrics but it’s a popular misconception that Berkshire doesn’t already report custom results. In its year-end earnings press release CFO Marc Hamburg explains that Berkshire makes non-GAAP adjustments, just like everyone else, to present its numbers “in the way it believes will be most meaningful and useful, as well as most transparent, to the investing public and others who use Berkshire’s financial information. ”
Berkshire routinely presents non-GAAP metrics such as operating earnings calculated by subtracting actual investment gains and losses and gains/losses on derivative transactions. Investors can expect to see that practice expands to include unrealized investment gains and losses that will now be required to be included in earnings. At the end of 2017, Berkshire Hathaway’s non-GAAP adjustments also included eliminating the impact of tax reform law, even though the new law gave Berkshire a $29 billion boost to net income as of Dec. 31.
Berkshire has also been chastised by the SEC for such selective reporting. In 2016 the SEC sent a letter questioning its choice of leaving acquisition-related expenses out of its reporting on segment operating results.