What has the Oracle of Omaha been up to?
Over the weekend, Berkshire Hathaway held its widely-followed Annual General Meeting in Omaha, Nebraska. The usual Buffett mania that accompanies the event was of course subdued by COVID-19, and only Buffett and vice chairman Greg Abel were in live attendance. Despite the circumstances, Buffett still dropped some valuable insights that may help investors navigate this unprecedented period of economic and market uncertainty.
The live stream began with Buffett reiterating (for over an hour) his conviction in the long-term economic future of America, but even the champion of “Buy American” could not shake the uncertainty of the near-term outlook for the economy or the financial markets. Buffett reminds the audience that investing in stocks is similar to buying in a productive asset such as a farm, and just because your schizophrenic neighbour offers to sell his farmland for $2,000 an acre one day and $800 the next, it doesn’t mean you should be racing to offload your own farmland at $800 an acre as well.
However, this doesn’t mean investors shouldn’t adopt a more cautious outlook in the near-term. Notwithstanding his Buy American rhetoric, Buffett disclosed that Berkshire had barely deployed any of its $137 billion cash pile to snap up opportunities during the March selloff or subsequent bounce. Indeed, during the month of April, Berkshire had purchased only $426 million of equity securities, while selling $6.5 billion of equity securities – predominantly the company’s entire investment in the four U.S. airlines. Explaining why Berkshire sold its entire U.S. airlines stake, Buffett said: “The airline business…I think it changed in a very major way…And I don’t know whether it’s two or three years from now that as many people will fly as many passenger miles as they did last year.” The same can probably be said about numerous other industries.
The lack of share purchases or acquisitions during the biggest drawdown since the GFC and sharpest rebound in history suggests that not only has Buffett (and Todd Combs and Ted Weschler) not found the value opportunities that he is famous for, he may be expecting the market to retest the March lows. Berkshire did not even repurchase its own stock during the period as Buffett saw greater “option value of money, to step up in a big, big way” – presumably to buy stocks if the market declined again.
The U.S. market as measured by the S&P 500 is back to where it was in October 2019, yet the economic outlook for not only the next few quarters but the next few years is far more uncertain than it was in October. It is not a stretch to argue that financial markets have sharply decoupled from the real economy and it should not come as a surprise that Buffett has kept a relatively conservative position throughout this period of great uncertainty.