The Motley Fool

Warren Buffett’s US$50 Billion Net Loss: What Went Wrong?

Image source: Getty Images

In Berkshire Hathaway’s annual meeting earlier this month, the company reported nearly US$50 billion in net losses. Most of it is paper loss was due to the devaluation of several companies in Berkshire’s portfolio. However, the company’s operating earnings improved by US$5.87 billion — a metric that, according to Buffett, offers a better outlook of his company’s quarterly performance.

What went wrong, and what can we learn from it? When you look for wisdom in a great person’s actions, life, and decisions, you don’t just look at their success; you analyze the failures as well. And one of the major failures this time for Buffett has been his decision to invest in airlines — a business that he didn’t really care about up until four years ago.

What should we learn

Warren Buffett’s loss isn’t the only event this year, which investors can learn something from. The pandemic-driven market crash has taught the market and investors a lot of important lessons. For example, no matter how smart you are at picking stocks, you can’t predict the future with certainty. And that unprecedented events force the market to move in unexpected ways.

So, if we can’t completely shake away the inherent risk associated with investing in stocks, what can we do? One answer to this is diversification. For large-cap investors, diversification usually entails different asset classes, like balancing stocks with gold, bonds, and lands. But for most retail investors with limited resources, investing in stocks is usually the most viable option to grow their wealth.

So, diversifying your stock investment portfolio is one way you can stay afloat, even when the market crash. And that requires picking stocks from different sectors and balancing your portfolio in terms of growth and dividend-based income. For example, airline stocks have hit rock bottom, but few software/tech stocks are soaring higher than ever. A portfolio with an equal weighting of both might see a balanced overall valuation.

Low-risk option

Power and utilities have traditionally been one of the most stable sectors, even through market crashes. Because even in the worst economic conditions, everybody needs utilities. One amazing stock from this sector is Algonquin Power & Utilities, a decade-old Dividend Aristocrat that focuses on clean energy facilities and has a stake in over 35 wind, solar, hydroelectric, and thermal power-generation facilities.

Through its Liberty Utilities division, the company provides water, gas, and electricity to over 750,000 customers in the United States. As a stock, it offers substantial capital growth as well as lucrative dividends. The current yield is a juicy 4.12%, and the company has increased its dividends by 46% in the last five years. It increased its share price by about 98.5% in the past five years and has already recovered from the slump.

Foolish takeaway

What we have learned from Buffett’s loss and the market crash, in general, is that nothing is inherently infallible. Algonquin is a very safe investment option. Not only is it a utility stock, but its focus on clean energy reflects that it’s well positioned for the future as well. But even companies like this might be disrupted if there is a breakthrough in, say, fusion power.

So, when you diversify your portfolio, make sure to do it as thoroughly as possible. You can’t plan for every eventuality, and too much diversification can result in stunted growth of your portfolio. But you will have to walk the fine line between risk and growth if you want your portfolio to live through future market crashes.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares).

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.