Warren Buffett’s Berkshire reports 77-per cent drop in quarterly profit

Even the world's richest investor is not immune to the vagaries of a market meltdown. This point as been firmly established by the whopping 77-per cent decrease in income reported by Warren Buffett's flagship investment vehicle Berkshire Hathaway.

However, going by the billionaire's investment philosophy over the years, which has ''encouraged him to buy when others are fearful,'' he wouldn't be unduly worried by the turn of events, rather looking at possible bargains in the market. Even the company's official line reflected this belief. ``Berkshire management believes these extraordinary conditions are temporary, and that equity prices will ultimately rise over time,'' a regulatory filing said.

Third-quarter net income decreased 77 percent to $1.06 billion, or $682 a share, from $4.55 billion, or $2,942, a year earlier, the Omaha, Nebraska-based company said yesterday in the regulatory filing. Operating earnings, which exclude net realized investment gains and losses, were $2.07 billion. This makes it the fourth consecutive decline in profit for the company, resulting in the longest streak of quarterly declines in at least 13 years.

Berkshire is a roughly $175-billion conglomerate that owns several dozen businesses in such areas as insurance, energy, housing, kitchen supplies, clothing and food.

It also tries to invest in out-of-favour companies with strong earnings and management. Insurance typically generates half of results. Buffett is the second-richest American according to Forbes magazine and an economic adviser to President-elect Barack Obama.

Berkshire, which owns National Indemnity Co., General Re Corp. and Geico Corp., said profit from underwriting insurance policies fell 83 per cent to $81 million. Its reinsurance group, which sells catastrophe coverage to other insurers, posted a $166 million pretax loss for the quarter. A lot of these losses can be attributed to the onslaught of recent hurricanes.

Decreases in the value of some holdings and derivatives lowered earnings by $1.01 billion in the period ended 30 September, compared with a $1.99 billion gain in the year-earlier quarter when Berkshire booked profits from selling a stake in energy firm PetroChina Inc.

October's declines in debt and equity markets reduced the value of Berkshire's investments and derivative contracts and caused shareholders' equity, a measure of assets minus liabilities, to fall by about $9 billion in the month, the company said in the regulatory filing.

Berkshire shares, which rose in 17 of the last 20 years, are down 20 per cent this year as some of the firm's largest stock investments slumped. American Express Co. has plunged 51 per cent this year, Coca-Cola Co. dropped 25 per cent and Procter & Gamble Co. declined 12 per cent. All three were among Berkshire's 10 biggest stock holdings at the end of June.

However, this downturn hasn't affected Buffett's personal belief in the power of equity. He has committed more than $27 billion of Berkshire's money this year to make acquisitions, finance takeovers and invest in blue-chip companies such as General Electric Co and Goldman Sachs Group Inc. The investments give Berkshire new ways to grow as the credit crisis drives asset values down and makes it harder for other companies to borrow. (See: Warren Buffett invests $3 billion in GE's $15-billion capital raising / Warren Buffett invests $5 billion in Goldman Sachs)

Last month, Buffett pledged to move all his personal holdings apart from Berkshire stock, which is pledged to charity, into US stocks from government bonds, citing long- term optimism in corporate America. (See: Warren Buffett expresses support for American stocks)