Warren Buffett warned in in his annual letter to shareholders that a new GAAP accounting rule on unrealized capital gains would lead to “truly wild and capricious swings in our GAAP bottom-line.”
The rule impacts Berkshire’s Hathaway’s portfolio of $170 billion in marketable stocks, not including the company’s shares of Kraft Heinz.
“For analytical purposes, Berkshire’s ‘bottom-line’ will be useless,” Buffett warned, noting that swings in Berkshire’s equity holdings could obscure the actual performance of its operating companies.
“The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income,” Buffett wrote. “In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.”
© 2018 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.