Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Over the decades in which he has run Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), Warren Buffett has been one of the most influential investors in the world. With stock markets hanging on his every word, Buffett has single-handedly helped give the market confidence during times of trouble while calling out exuberance and overvaluation during boom times. Therefore it's somewhat surprising today that after a favorable earnings report from Berkshire over the weekend, the Dow Jones Industrial Average (DJINDICES:^DJI) is down 38 points as of 11 a.m. EDT, falling back slightly from Friday's record close.
More than many conglomerates, Berkshire represents a microcosm of the entire economy. With its host of wholly owned insurance, railroad, consumer, energy, and other businesses, Berkshire has a broad reach within its corporate structure that encompasses a broad swath of industries. Through the stock portfolios of its insurance subsidiaries, Berkshire gets even broader exposure to the market. As a result, news Friday that second-quarter profit at Berkshire rose 46% might suggest favorable economic conditions that would ordinarily boost the rest of the stock market.
Yet Berkshire's earnings results don't really come as a huge surprise to its long-term investors. Predicting gains in its investment portfolio is as easy as measuring the changes in the stock prices of its reported holdings. Moreover, by looking at publicly traded companies in the same industries as Berkshire's largest subsidiaries -- e.g., car insurance giant Geico, railroad Burlington Northern Santa Fe, and Berkshire's latest joint purchase, condiment maker Heinz -- investors can get a sense of how the wholly owned side of Berkshire's business is doing long before it reports earnings.
By contrast, daily movements in the Dow tend to be driven less by favorable long-term trends and more by the news of the day. The earnings of influential companies often play a part in the Dow's moves, but investors will also look at comments later this morning from Dallas Federal Reserve President Richard Fisher about the state of the U.S. economy and its potential impact on the Fed's future actions. Even a positive report from the services industry, where the Institute for Supply Management reported a better-than-expected reading indicating faster expansion, was only enough to slightly reduce the Dow's opening losses.
No matter how influential Berkshire is, it remains just one company -- and one that has a much different perspective on the importance of long-term investing over short-term trading from many who follow the Dow. As a result, it shouldn't be surprising to see the two diverge on a single day, even if much of Berkshire's success owes to the market's long-run growth.