The predominant keys to Buffett’s success have been his talent for buying companies with lasting competitive advantages and for staying invested in those companies for very long periods of time. For example, the top 10 Berkshire stocks by market value have been held for an average of over eight years.
Suffice it to say that when Buffett buys or sells stocks, Wall Street and retail investors take notice. That’s why the August 14 filing of Form 13F with the Securities and Exchange Commission was a snap.
A 13F provides investors with insight into what fund managers with over $ 100 million in assets achieved in the previous quarter. Since the second quarter happens to be one of the worst quarters in U.S. history for the U.S. economy, investors were rightly interested in what one of the most successful investors on the planet has made with his company’s money.
But not everything in Berkshire Hathaway’s 13F has been up to Wall Street expectations. By leaving the company’s stake in the investment banking giant Goldman Sachs was predictable, as was the sale of Berkshire’s ordinary stake in Western Oil, four other movements are particularly surprising.
Berkshire Hathaway bought gold stock
There is no doubt that the biggest surprise of all was the purchase of 20.92 million shares of Barrick Gold (NYSE: OR).
It’s not the $ 564 million that Berkshire bought that is staggering, so much the fact that Berkshire now owns gold mining stock after the Oracle of Omaha touted physical gold as a terrible investment for decades. decades. Buffett once criticized the lack of usefulness of gold, that is, gold does not produce anything. Rather, he prefers Berkshire to buy from companies that create products or offer services in order to generate consistent or growing cash flow.
Why did Buffett buy Barrick Gold? My personal suspicion is that it wasn’t Buffett at all, but rather one of his two investment lieutenants, Todd Combs or Ted Weschler. Based on the sheer number of stock sales curtailed over the past two quarters by Berkshire Hathaway, who doesn’t quite look like Buffett, it looks like Combs and Weschler have more control over day-to-day asset management.
Despite Buffett’s distaste for the shiny yellow metal, I expect the Barrick Gold selection to work for Berkshire Hathaway. Historically low bond yields and a rising money supply in the United States should be positive for the price of gold. At the same time, Barrick Gold has been successful in reducing its net debt and is expected to experience an increase in its free cash flow in the coming quarters.
JPMorgan Chase received a great haircut
Bank stocks are absolutely Buffett’s favorite place to park Berkshire Hathaway money, so you can imagine the surprise when the company’s 13F showed that 35.5 million shares of JPMorgan Chase (NYSE: JPM) had been sold in the second quarter.
Why reduce the company’s stake in JPMorgan Chase by 61% but strengthen the company’s position (in recent weeks) by Bank of America (NYSE: BAC)? The best guess I can come up with is that Buffett consolidates some of his positions in the financials sector and looks to take advantage of the Bank of America’s interest rate sensitivity when the Federal Reserve starts to raise rates again.
While JPMorgan’s investment banking business has been fantastic, consumer bank lending fell 7% in the second quarter and the company set aside a whopping $ 10.5 billion as a provision. for credit losses. These loan loss reserves are likely to build up in the coming quarters as loan delinquencies related to the coronavirus increase.
Again, this does not concretely explain “why JPMorgan Chase?” But with Todd Combs on the board of JPMorgan and Berkshire heavily selling his position, it certainly raises an eyebrow.
Visa and Mastercard are cut
Another surprise of Berkshire Hathaway’s 13F is that the two major credit card payment processors in the United States, Visa (NYSE: V) and MasterCard (NYSE: MA), have both been slightly reduced. Berkshire reduced its stake in Visa from 575,000 shares to about 9.99 million, while Mastercard was reduced from 370,000 shares to about 4.56 million.
Again, the question to ask is: why? If there are two companies that have proven to be very recession-resistant in the financial sector, it is Visa and Mastercard. With the exception of 2009 for Visa and 2008-2009 for Mastercard, these two payment processors have overseen an increase in the amount of payment dollars flowing through their credit card processing networks over the past 13 years.
Additionally, Visa and Mastercard are not lenders like some of their competitors. While this means that it is not possible to double the interest income and fees of merchants during times of economic expansion, it also means that Visa and Mastercard have no direct responsibility when credit arrears. begin to increase during an economic contraction or recession. This is why Visa and Mastercard have respectively enviable profit margins of 51% and 45% over the past 12 months.
Considering the relatively small size of these cuts by Berkshire Hathaway, it is possible that this was the work of Combs or Weschler. But no matter who made the sale, they’ll probably regret it.
Buffett was a big net seller of stocks
Finally, investors will note that the Oracle of Omaha and his team sold significantly more shares than they bought in the second quarter. It’s certainly shocking when you consider that the coronavirus stock market crash was the fastest and steepest in history, and Berkshire Hathaway has a record amount of cash.
Although Buffett has invested around $ 12 billion recently by purchasing more than $ 2 billion of Bank of America common stock and acquiring natural gas transportation and storage assets from Dominion Energy for $ 9.7 billion, he’s made it clear by his actions, or should I say his absence, that he’s not a fan of stocks at the moment.
Warren Buffett feeds on value. However, finding value beyond buying back stock in your own company has proven difficult. Given Buffett’s track record, it’s far too early to be put off by his lack of action in recent years. But the Oracle of Omaha’s inaction may well represent a silent warning to investors that stocks are not as attractive as they seem.