Warren Buffet’s Berkshire Hathaway posts a loss, but improving operating earnings give hope for US economy

Warren Buffett’s investment giant Berkshire Hathaway has posted its second straight quarterly loss, with the company’s derivatives trading arm again dragging the rest of the giant conglomerate down.

Berkshire, based in Buffett’s home town of Omaha, posted net earnings of just under $3 billion in the three months to September 30, down 7.7% from $US3.24 billion in the previous corresponding period.

While Buffett has previously said that derivatives are “financial weapons of mass destruction”, his company continues to hold a portfolio of derivates – mainly bets against equity markets falling – worth about $US60 billion. In the September quarter, the derivatives portfolio posted a $US95 million loss, although this is a paper loss – most of derivates are long-term, but movements in their value must be recognised each quarter whether they are unrealised or not.

Michael Yoshikami, who manages a $1 billion portfolio that includes Berkshire shares for YCMNet Advisors told Bloomberg the loss highlights the dangers of derivates contracts, and expects Berkshire Hathaway to reduce its use of the instruments.

“I’m sure Warren Buffett’s appetite for derivatives is less than it was,” he said.

However, it wasn’t all bad news. Revenue grew 21% in the third quarter to $US36.3 billion, while profit from Berkshire’s operating businesses was strong, jumping 36% to $US2.8 billion.

In good signs for the broader US economy, revenue at Burlington Northern Santa Fe railroad (which Buffett purchased in February in a $US37 billion deal) grew 22% to $US4.4 billion in the quarter as industrial, agricultural and consumer product shipping grew.

And earnings from Berkshire’s manufacturing, service and retail unit, which includes everything from jewellery and clothing companies to a paint maker and vehicle builder, nearly doubled to $645 million.

“We are hopeful that recent economic improvements will continue over the remainder of 2010 and beyond,” Berkshire said in its third-quarter report.

Berkshire recently made news when it hired relatively unknown investment manger Todd Combs as a potential successor for Buffett as chief investment officer.