Buffett's Berkshire Hathaway Suffers Profit Drop in 3Q, Derivatives to Blame

(November 6, 2011) — Warren Buffett’s Berkshire Hathaway has suffered a profit decline of 24% to $2.28 billion in the third quarter, largely as a result of losses tied to derivative bets.

Net income dropped to $2.28 billion, or $1,380 a share, from $2.99 billion, or $1,814, a year earlier. Revenue slid to $33.7 billion from $36.3 billion last year. Operating profit, on the other hand, increased 37% to $2,309 per share, beating estimates.

The derivatives portfolio produced a $1.59 billion quarterly loss, compared with a loss of $95 million a year earlier. The declines stemmed partly from large drops in Wells Fargo & Co., American Express Co., and Buffett’s equity-derivative bets, Bloomberg earlier reported. Berkshire is the largest shareholder in Wells-Fargo, with a stake totaling about 6.7%. With a roughly 13% stake, Berkshire is also a top shareholder in American Express, which dropped approximately 13% in the period.

According to Berkshire Hathaway’s financial statements, the firm spent nearly $7 billion in equities, and spent $17.9 million on buybacks.

Things may soon turn up for Buffett, based on a recent survey by Northern Trust, which concluded that while institutional investment managers have an increasingly dismal outlook on economic growth in the United States, many still see opportunities in the US equity markets. The third quarter 2011 Northern Trust Global Advisors (NTGA) manager survey showed that a total of 75% of managers believe US equities are undervalued — US large cap equities were the highest ranked asset class, while technology was the highest ranked sector in the third quarter.

“After what was clearly an incredibly challenging quarter, our managers seem to be saying that although they see plenty of opportunities in the market at current valuations, it’s buyer beware given the considerable headwinds that may be coming our way.” said Christopher Vella, Chief Investment Officer for NTGA, the multi-manager business of Northern Trust.

The study showed that the European debt crisis is perceived to be the biggest risk to equity markets in the next six months. A total of 63% of managers anticipate the European debt crisis will spill over to other areas of the market.