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Warren Buffett's Long-Term Investing Will (Finally) Boost Short-Term Earnings This Quarter

Friday, 7 Aug 2009 | 12:11 PM ET

Stock market gains in April, May, and June, will energize second quarter net earnings from Warren Buffett's Berkshire Hathaway when the numbers are released after the stock market closes today.

That will be a sharp contrast from recent quarters when market losses depressed Berkshire's net numbers and its stock price.

The U.S. benchmark S&P 500 index gained 15.2 percent over the three months. That will sharply reduce the "paper" net losses from a multi-billion dollar series of equity put options written by Berkshire.

The derivatives are a form of insurance, sold by Berkshire to buyers who want to protect themselves against long-term drops in the S&P and three other global stock indexes.

Berkshire has already taken in almost $5 billion in premiums on the insurance, which it can invest. It will only have to pay any claims if, on various dates between 2019 and 2028, the "insured" stock indexes wind up lower than where they were when the policies were written in the last few years.

Under accounting rules, however, Berkshire has to calculate how much it would make or lose on those policies if they were cashed in now, and include that result in its net earnings each quarter. (The terms of the deals prevent the buyers from trying to collect before expiration.)

In recent quarters, the "paper" losses piled up as stocks fell, hurting Berkshire's net profit.

With stocks rebounding, some of those losses will be erased, giving net earnings a boost.

While many Buffett followers argue the derivative "losses" don't matter all that much on a quarter-by-quarter basis, the looming billions in potential liabilities did help depress Berkshire's stock price and support critics who contended Buffett had "lost his touch."

Earlier this week, Berkshire shares hit $100,000 for the first time since January, as rising stock prices helped ease worries about the put options.

The stocks held in Berkshire's investment portfolio have also climbed during the quarter. (American Express and Wells Fargo both soared over 70 percent.) While those paper gains won't be included in net earnings, they do contribute to Berkshire's book value, a favorite metric for Buffett that captures assets minus liabilities.

Bloomberg notes that based on book value, Berkshire may "report its best quarter in at least two years," thanks to $11 billion in paper gains on stocks and derivatives. Glenn Tongue at Berkshire shareholder T2 Partners tells Bloomberg, "It's going to be a blockbuster. It may well be the greatest dollar gain in book value in any quarter in the history of the company."

For this quarter, at the very least, it looks like Buffett's famous long-term perspective on making money will also pay off in the short term.

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