When the krona virus crisis first began, market watchers were eager to see if Warren Buffett was Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) would make a big move. The Berkshire chief has been complaining for years that stocks and companies are too expensive, and he has not “sacked an elephant” since his 2015 acquisition of Precision Castparts. The end of an 11-year-old bull market seemed to be a perfect opportunity for him to leverage the $ 137 billion Berkshire’s own away.
After Berkshire’s shareholders’ meeting earlier this month and the company’s 13-F filing that revealed its shares in the first quarter, we now know that Buffett has not made any major purchases. He actually did the opposite. Buffett has been a net seller of shares, dampened its stake in the four major airlines and reduced its holding of Goldman Sachs and JPMorgan Chase, although he has historically been a fan of bank shares.
The man who famously said “Be scared when others are greedy and greedy when they are scared”
There is a lot of uncertainty out there
Buffett has consistently expressed long-term optimism throughout the crisis, but he has been more cautious about the near future. In comments at Berkshire’s shareholders’ meeting in early May, Buffett said:
When we embarked on this journey, which we did not ask for, it seemed to me that there was an extremely large variety of opportunities on both the health and the financial side. There were DEFCON 5 on one side and DEFCON 1 on the other side, and of course no one knows all the possibilities available, and they do not know what probability they are. But in this situation, it seemed to me that there were an extraordinary number of things that could happen on the health side and an extraordinary interval in the economy.
Buffett continued to acknowledge that the scenarios had been eliminated in the worst and worst cases, but there is still a wide range of opportunities out there – making it particularly difficult for a value investor like Buffett to make smart purchases, as there is a wide range of opportunities in future cash flows and earnings. Despite his belief in airlines, for example, Buffett believes the industry has fundamentally changed. Demand will decline in the foreseeable future, which is particularly problematic for an industry with high fixed costs.
Buffett is right about the uncertainty. Even with the latest announcement from modern About a successful Phase 1 vaccine study, we do not know if there will be an effective vaccine within the next year or two, or even ever. We do not know if there will be another wave of infections and whether companies will have to close again. The future is especially hard to predict right now.
Prices are still too high
It is not surprising that Buffett, who has complained about the market being overvalued in recent years, would still think the shares are overpriced. Although prices are still falling by double-digit percentages from the February highs, the short-term revenue picture has deteriorated significantly, and uncertainty dilutes the ability to make a correct forecast.
Asked why Berkshire had not acted as a lender of support, as it did several times during the financial crisis, with positive efforts in the form of preferred stock and warrants, Buffett said, “We have not seen anything attractive.” Buffett added that the Federal Reserve stepped in to support companies that would otherwise have come to Berkshire for help saying, “But that means many companies that needed money and probably should have made their financing a little earlier, but they are perfect decent companies, got the chance to fund tremendously in the last five weeks or so. “
Buffett said he got calls from companies in need, but didn’t find any of them appealing, so Berkshire has kept his wallets.
Sometimes it pays to wait
Buffett is not a fan of market timing and says he does not know anyone who can do it, but he noted that during the recent crisis he may have acted prematurely. Referring to the purchases Berkshire made in the fall of 2008, Buffett said “Now it turned out that we would have been much better off if we had waited four or five months to do similar things.”
The Berkshire chief also made some of his best deals at the end of the crisis. For example, in 2011 he bought $ 5 billion in preference shares in American Bank, giving 6%, a deal that has netted the company more than $ 20 billion, including some investment in B of A later.
Buffett feels that better opportunities will present themselves as the crisis plays out. It’s only been about two months since the closures began, so for fighter companies, liquidity is likely to be tighter a few months from now than now.
Buffett maintained his usual optimism about the American economy and said, “We haven’t met this exact problem. We haven’t actually encountered anything quite similar to this problem, but we faced tougher problems. The American miracle, the American magic has always advised, and it will do it again. “
In the long run, US equities and the economy have always jumped back and continued to grow – and over a five or ten year horizon, the corona virus may prove to be just a dip. But Buffett’s cautious tone was noticed and it is clear that there is a high level of uncertainty ahead.
Whether Buffett will go elephant hunting this year remains to be seen, but for the moment, Oracle of Omaha seems content to keep its powder dry.