When the coronavirus crisis started, market observers were anxious to see if Warren Buffett Berkshire hathaway (NYSE: BRK.A) (NYSE: BRK.B) would take a big step. The head of Berkshire has lamented for years that stocks and companies are too expensive, and he hasn’t “bagged an elephant” since his 2015 acquisition of Precision Castparts. The end of an 11-year bull market seemed like a perfect opportunity to use the $ 137 billion Berkshire squirrel.
After the Berkshire shareholders meeting earlier this month and the company’s 13-F file revealing its stock movements in the first quarter, we now know that Buffett did not make any large purchases. In fact, he did the opposite. Buffett was a net seller of shares, dropping his stake in the four major airlines and reducing the holdings of Goldman sachs and JPMorgan Chase, even though he’s always been a fan of banking stocks.
The man who said “Be fearful when others are greedy and greedy when they are afraid” now seems to be afraid. Based on his recent comments, we understand why.
There is a ton of uncertainty out there
Buffett has consistently expressed long-term optimism throughout the crisis, but has been more cautious about what the short term holds. In his comments to the Berkshire shareholders meeting in early May, Buffett said:
When we started this journey, which we had not asked for, it seemed to me that it was an extraordinary variety of possibilities both on the health side and on the economic side. There was DEFCON 5 on one side and DEFCON 1 on the other side, and nobody really knows, of course, all the possibilities that exist, and they don’t know how likely they are. But in this particular situation, it seemed to me that there was an extraordinary range of things that could happen on the health side and an extraordinary range in terms of economics.
Buffett then acknowledged that the worst and best scenarios had been ruled out, but there is still a wide range of possibilities – making it particularly difficult for a value investor like Buffett to make smart purchases, since there is a wide range of possibilities in future cash flows and profits. Despite his confidence in the airlines, for example, Buffett believes that the industry has fundamentally changed. Demand will fall for the foreseeable future, which is particularly problematic for an industry with high fixed costs.
Buffett is right about the uncertainty. Even with the recent announcement of Moderna on a successful phase 1 vaccine trial, we don’t know if there will be an effective vaccine in the next two years, if ever. We don’t know if there will be a new wave of infections and if businesses will have to close again. The future is particularly difficult to predict at this time.
Prices are still too high
It’s no surprise that Buffett, who has complained about the overvaluation of the market in recent years, would still believe that stocks are overvalued. Although prices are still down to double-digit percentages from February’s highs, the picture for short-term profits has deteriorated significantly and uncertainty obscures the ability to make accurate forecasts.
When asked why Berkshire had not acted as a supporting lender as it had repeatedly done during the financial crisis, taking favorable holdings in the form of preferred shares and warrants, Buffett said, “Well, we haven’t seen anything attractive. Buffett added that the Federal Reserve stepped in to support companies that could have come to Berkshire for help, saying, “But that means a lot of companies that needed the money and probably should have done their job.” funding a little earlier, but they are perfectly decent businesses, have had the chance to fund huge in the past five weeks or so. “
Buffett said he receives calls from companies in distress, but none of them is attractive, so Berkshire held onto his purse strings.
Sometimes it’s worth the wait
Buffett is not a fan of market timing, saying he doesn’t know anyone who can, but he observed that during the last crisis, he may have acted too soon. Referring to Berkshire’s purchases in the fall of 2008, Buffett said, “It turned out that we would have been much better if we had waited four or five months to do similar things. “
The head of Berkshire also closed some of his best deals towards the end of the crisis. For example, in 2011, it bought $ 5 billion in preferred shares in Bank of America, earning 6%, an agreement that grossed the company more than $ 20 billion, including some investments in B of A later.
Buffett can sense that better opportunities will arise as the crisis unfolds. It’s only been about two months since the closings started, so for struggling businesses, liquidity will likely be tighter in a few months than it is today.
Buffett kept his usual optimism about the US economy, saying, “We haven’t faced this exact problem. In fact, we have not really faced anything that looks very much like this problem, but we have faced more difficult problems. The American miracle, the American magic has always prevailed and will continue to do so. “
Indeed, over the long term, US stocks and the economy have always rebounded and continued to grow – and over a five- or ten-year horizon, the coronavirus could prove to be just a plunge. But Buffett’s cautious tone was noticeable, and it is clear that there is a high level of uncertainty ahead.
Whether Buffett will go on an elephant hunt this year remains to be seen, but for now the Omaha Oracle seems content to keep its powder dry.