Imagine a stack of $1 bills that reaches nearly 3,000 miles into the sky. That's how high $44 billion would be. And it's a pretty good picture of how much money Warren Buffett's Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) lost in the second quarter of 2022.
How did one of the biggest companies on the planet led by one of the most successful investors of all time lose that much money? It was surprisingly easy to do.
Only on paper
Let's first be clear on one important point: Berkshire's loss was only on paper. The company's businesses generated Q2 revenue of nearly $76.2 billion with total expenses of a little under $65 billion. That translates to an operating profit of over $11 billion.
But Berkshire reported a net loss of $43.8 billion. So where did this staggering loss come from? The company recorded a loss of $66.9 billion on investments and derivative contracts.
Most of this sizable loss stemmed from the dismal performance of many stocks in Berkshire's portfolio during the second quarter. Only $65 million of the loss related to derivative contracts.
Also, nearly all of the investment loss was unrealized. In other words, Berkshire didn't sell the stocks at a lower price than it paid for them. It simply had to book a loss because the share prices fell during the quarter. The giant conglomerate actually made a small profit of $32 million on stocks that it did sell during Q2.
The biggest culprits
Some stocks took a much bigger toll on Berkshire's bottom line than others did. Apple (AAPL 0.64%) ranked as one of the biggest culprits in the huge net loss.
The tech stock made up nearly 43% of Berkshire's total holdings at the end of the first quarter. Berkshire added to its stake in Apple during Q2. But the stock fell nearly 22% during the period. That steep decline combined with Berkshire's large position weighed heavily on the company's bottom line.
Bank of America (BAC 1.70%) also contributed significantly to Berkshire's big investment loss. The bank stock is Berkshire's second-largest position, making up around 10% of its portfolio. BofA's shares sank 24% during Q2.
We can't overlook American Express (AXP 2.56%), either. The financial services giant is Berkshire's fourth-largest holding. And its shares plunged 26% in Q2.
Of course, these three stocks weren't the only stinkers in Berkshire's portfolio. However, they comprised nearly 60% of the conglomerate's total holdings as of the end of the first quarter. When these stocks fall significantly, Berkshire is very likely to record an unrealized investment loss.
Meaningless
If we asked Buffett about the Q2 net loss of almost $44 billion, he'd probably reply that it was essentially meaningless. Here's what Berkshire Hathaway had to say in its regulatory filing for the second quarter:
We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We continue to believe the investment gains/losses recorded in earnings in any given period has little analytical or predictive value.
Buffett bought more shares of Apple during the first quarter when its share price declined. He bought more shares again in Q2. The legendary investor understands that stock prices often don't accurately reflect the real value of the underlying business.
In reality, you'll never see a stack of $1 bills that's nearly 3,000 miles tall. And Buffett will probably never see a true net loss of close to $44 billion.
