The latest filing from Buffett’s Berkshire shows they were a NET seller of stocks in April. But the questions is why Buffett is not buying stocks during this current crisis? In this short post, I will just give my two cents on why that is…
The legendary Mr Warren Buffett
Without a doubt one of the most famous investors of all times and his long-term track record is magnificent (above 20% per annum for decades). Every year Mr Buffett and his Berkshire Hathaway hold a large annual meeting for their investors and Mr Buffett answers questions, normally for hours and hours. This time was no different, well slightly as the event did not take place live in Omaha as it normally does. It is by no means a small event and last year (2019) a record breaking 40,000 people attended!
Mr Buffett has many famous quotes which I sometimes have cited in my posts. One of the most popular ones was relating to ETFs and Why Warren Buffett recommends ETF’s which also has become one of our most popular posts.
Corona crisis and market volatility
Since the end of February 2020 more or less the whole world has been affected by Covid-19 and most countries have implemented some restrictions as to what their populations can and cannot do. This is of course, as they say, because they want to save as many lives as possible from Corona.
The implications on the financial market were initially very severe and we saw the fastet drop in share prices ever and volatility (price movement) has been sky high!
Mr Buffett has not been talking very much about the current environment prior to his annual genereal meeting. The few comments he has given have mostly been that he believes in the economy and that this is just one new experience he will have to add under his belt as a life time investor.
After the inital sharp drop, we have seen massive stimulus packages from governments and central banks around the world which has for sure helped to prop up the financial markets. From a low of more than 30% from peak levels, the market has since recouped around 20% of that fall.
Of course the holdings of Berkshire Hathaway have also been affected to various extents and his large stakes in four airline companies have obviously taken a massive hit as there are basically no flights taking place!
After selling some of the stocks in the arline companies, he then offloaded all of his holdings in Delta Air Lines, United Airlines, American Airlines and Southwest Airlines in April. It’s pretty obvious that even an investor with decades of an investment horizon has a rather grim outlook on the airline industry!
Buffett says “Never bet against America”
The full quote from his Annual General Meeting (AGM) was: “Nothing can stop America when you get right down to it. Never bet against America,”
He was then referring to history and being such a great story teller with loads of knowledge about history and data, Mr Buffett is a facinating man to listen to. I am not saying that this has not been the case as America has been and is a great nation and betting against it might not be a brilliant idea…
BUT does that mean that we should instead be buying stocks and investing in American (or global) companies in this environment? A lot can happen over very long periods of time and history might repeat itself and depending on what time frames one is looking at, the “result might vary”.
Personally I don’t think this quote was meant to say you should run out and buy stocks now because they are cheap. It was more a point of trying to calm investors and the market in general. Buffett has influece and what he says and does will have an impact on markets.
Walking the talk?
As one of the largest investors, he has been sitting very tight only really offloading his airlines and again, that’s a very clear sign that it will be really bad for them. Some will probably go bust and it will take years before that industry is back to anything that looks somewhat like before the crisis.
This is not like any other crisis as it’s more or less affecting every business in one way or another and on top of that on a global scale! Never before has the world come to such a simultaneous “stand still”. Then, if no one knows for how long this will last, how is one then to estimate the implications on different companies? Very hard of course.
That is why liquidity is key and Berkshire has been hoarding cash for quite some time. Markets have been expensive and based on the size of the Berkshire company, they need to buy large companies for it to have any meaningful impact on their performance.
With current valuations there are clearly no bargains to be found! The panic selling came fast and dissapeared fast but valuations remain sky-high. Even if companies are not making any or little money they still have costs. This can only last for so long and it seems even Buffett wants to understand the consequences better prior to making any large investments and on top of that, companies are almost as expensive as prior to Covid-19 and that is crazy!
In April they were net sellers of stocks and had Mr Buffett been optimistic about the future, I for sure think he would have been much more outspoken and this would also show in the numbers! The lack of purchasing of stocks and companeis, to me, is a clear warning sign that this is far from over and there are no bargains to be found. That only means that markets have to come down from here because there is no other way as corporate profits are very unlikely to bounce back in the near term to pre crisis levels!
I would also say that he did send a warning to those buying stocks out of FOMO when he said: “Don’t borrow to buy stocks & don’t invest in stocks the money you’ll need soon”. Clearly he wants us to be cautious, just as he is being with his company’s cash pile.
In this instance, I actually think Mr Buffett’s long term partner Charlie Munger sent the clearest message when he said the following during an interview in mid April: “I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes. We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity.”
Basically, they need to take care of their own companies first and foremost and if one is not able to comprehend the possible extent of the Corona lock-downs one should maybe not be looking at buying other companies. Except, if the opportunity is good enough but clearly they have yet to emerge!
The fact that the government and the central bank have been fast to react and pumping in trillions into the financial system of course helps companies and might mean they are not reaching out to Mr Buffett. If you can find funding, cheaply via the government or central bank, why would you go to someone who would want a great deal to come to your assistance?
Buffett is not buying and that alone says it all! The markets are basically disconnected from the corporate realities amind all the government and central banking support. Hubris amongst investors or FOMO, whatever it is is keeping prices at levels Mr Buffett clearly don’t see as great buying opportunities.
Within the world of investing, he is probably one of the best connected in the world, and if he is not buying, should you and me then be punting in the market??
Well, if we have a clear investment strategy, are very long-term, diversified and consistent with our investments and comfortable with our own “liquidity” situation, then I would say, yes.
If we are not or if we are concerned about the real consequeces for the economy that these governmental decisions will have, then we should thread very, very cautiously. Stimulus will help but an unemployment level of 15% will for sure have an impact on many companies and their profits and hence their prices…
When a genious speak, we shall listen but not listen blindly because often the real value is in our actions and not in our words.
Actions to take:
- Why Buffett recommends ETFs
- FIRE aspirants – Winners in falling markets
- The Bear is here – FIRE dreams in flames