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Berkshire’s breaking records | Klarna says "pay up" |

Hi Reader, here's what you need to know for March 1st in 3:07 minutes.

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Today's big stories

  1. Warren Buffett’s Berkshire Hathaway reported record earnings
  2. Goldman Sachs has laid out one long-term opportunity that could emerge from rising interest rates – Read Now
  3. Swedish startup Klarna saw strong growth – and big losses – last year

Wordles Of Wisdom

Wordles Of Wisdom

What’s Going On Here?

Berkshire Hathaway posted record earnings over the weekend, because Warren Buffett always seems to have the right answer.

What Does This Mean?

The world economy was finally getting back on its feet last year, and conglomerate Berkshire Hathaway just sat back and reaped the rewards. The firm’s railroad business really, ahem… picked up steam, reporting a record profit as companies got back to moving goods around the world. That helped bring Berkshire’s operating profit up 25% to a record-breaking $27 billion in 2021. The firm’s investments soared last year too, including a $41 billion gain just from its Apple shares. Put all together, and Berkshire’s net income more than doubled to reach a record $90 billion. That’s a lot of records.

Why Should I Care?

The bigger picture: Berkshire has cash to spare.
All this, and Berkshire hasn’t even struck any big deals in the last six years. That’s mainly because Berkshire CEO Warren Buffett has been deterred by sky-high stock valuations, which he puts down to two years of cheap money fueled by low interest rates. Instead, the company’s been buying its own shares, including a – yep – record $27 billion worth last year. Even that’s barely made a dent in its cash pile: the company ended 2021 with $147 billion in the bank.

For markets: Stick with stocks.
Buffett also had some thoughts to share with investors in light of last month’s events. The Oracle of Omaha reckons the best way to build wealth in the long term is to invest in stocks, and warned against dumping them – as well as against hoarding cash and buying gold or bitcoin – in times of conflict (tweet this). See, Buffett reckons the value of money will only go down during wartime, whereas stocks – which represent actual businesses – should eventually start growing again. In short, he sees this conflict-induced dip as a prime buying opportunity.

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Analyst Take

The Long-Term Opportunity From Britain’s Rising Interest Rates

The Long-Term Opportunity From Britain’s Rising Interest Rates
Photo of Carl Hazeley

Carl Hazeley, Analyst

What’s Going On Here?

It’s hard not to get caught up in talk of the short term right now.

Most investors are, after all, fixated on the Russia-Ukraine crisis, which is having an immediate and very tangible impact on their portfolios.

But this could serve as the reminder you need to take positions that’ll bolster your portfolio for the next five to ten years.

And investment Goldman Sachs has exactly that: an opportunity tied up with UK interest rates whose upside potential won’t be realized for a few years yet.

So that’s today’s Insight: the long-term opportunity emerging from Britain’s rising interest rates.

Read or listen to the Insight here

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Never-Ending Story

Never-Ending Story

What’s Going On Here?

Klarna reported a mixed earnings update on Monday, so maybe the Swedish buy-now-pay-later startup should’ve been more specific about the “later” part…

What Does This Mean?

With its most recent valuation putting it at $46 billion, Klarna holds the title of Europe’s most valuable startup. And it’s easy to see why: cash-strapped shopaholics can’t get enough of its interest-free loans, with the company adding 70% more active users last year to bring its total to 147 million. That helped push the total value of transactions on its platform up by 42% compared to the year before, and the firm’s revenue up by 38%. But it turns out shoppers like putting off their payments a bit too much: Klarna’s credit losses – those it sustains when users don’t pay back their loans – almost doubled to $487 million. Throw in rising admin costs, and the firm’s net loss was quadruple what it was the year before…

Why Should I Care?

The bigger picture: This is a crowded market.
Buy-now-pay-later (BNPL) really kicked off during the pandemic, and it’s showing no signs of slowing down: Worldpay estimates that the sector accounted for 2.1% of the total value of global ecommerce transactions in 2019, and that’s expected to hit 4.2% by 2024. But with huge growth comes huge competition, and Klarna has plenty of that: it’s not just up against dedicated BNPL firms Affirm, Paidy, and Afterpay, but banks like Monzo, Revolut, and Barclays too.

Zooming in: Klarna was built for a different world.
Klarna’s credit losses are worrying enough for investors, but there are arguably even bigger problems ahead. Klarna partly funds the short-term loans it offers by its own short-term borrowing, which works in a world where interest rates are low. But with most major central banks expected to raise rates and keep raising them for the foreseeable future, cheap money – and big profits – are going to become a lot harder to come by…

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💬 Quote of the day

“It’s not that I’m so smart. It’s just that I stay with problems longer.”

– Albert Einstein (a German-born theoretical physicist)
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