When the coronavirus crisis first started, market watchers were eager to see if Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) would make a big move. The Berkshire chief 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 to present a perfect opportunity from him to make use of the $137 billion Berkshire’s squirreled away.
After Berkshire’s shareholder meeting earlier this month and the company’s 13-F filing revealing its first-quarter stock moves, we now know that Buffett has not made any big purchases. In fact, he’s done the opposite. Buffett’s been a net seller of stocks, ditching his stake in the four major airlines and cutting back on holdings of Goldman Sachs and JPMorgan Chase, even though he’s historically been a fan of bank stocks.
The man who famously said “Be fearful when others are greedy and greedy when they are fearful” now seems fearful. Based on his recent comments, we have some sense why.
There’s a ton of uncertainty out there
Buffett has consistently expressed long-term optimism through the crisis, but he has been more cautious about what the near term holds. In comments at Berkshire’s shareholder meeting in early May, Buffett said:
When we started on this journey, which we didn’t ask for, it seemed to me that it was an extraordinary wide variety of possibilities on both 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 there are, and they don’t know what probability they are. But in this particular situation, it did seem to me that there was an extraordinary range of things that could happen on the health side and an extraordinary range in terms of the economy.
Buffett went on to acknowledge that the worst-case and best-case scenarios had been eliminated, but there’s still a wide range of possibilities out there — which makes it particularly difficult for a value investor like Buffett to make smart buys, as there’s a wide range of possibilities in future cash flows and earnings. Despite his faith in airlines, for example, Buffett believes that the industry has fundamentally changed. Demand will be down for the foreseeable future, which is especially problematic for an industry with high fixed costs.
Buffett’s right about the uncertainty. Even with the recent announcement from Moderna about a successful phase 1 vaccine trial, we don’t know if there will be an effective vaccine within the next year or two, or even ever. We don’t know if there will be another wave of infections and if businesses will have to close again. The future is especially hard to predict right now.
Prices are still too high
It’s not surprising that Buffett, who has complained about the market being overvalued for the last several years, would still believe that stocks are overpriced. Though prices are still down double-digit percentages from February’s highs, the near-term earnings picture has significantly deteriorated, and the uncertainty clouds the ability to make an accurate forecast.
Asked why Berkshire had not acted as a lender of support as it did several times during the financial crisis, taking favorable stakes in the form of preferred stock and warrants, Buffett said, “Well, we haven’t seen anything attractive.” Buffett added that the Federal Reserve stepped in to support businesses that may have otherwise come to Berkshire for help, saying, “But that means that a lot of companies that needed money and probably should have done their financing a little earlier, but they’re perfectly decent companies, got the chance to finance in huge ways in the last five weeks or thereabouts.”
Buffett said he was getting calls from companies in distress, but didn’t find any of them appealing, so Berkshire has held its purse strings.
Sometimes it pays to wait
Buffett is no fan of market timing, saying that he doesn’t know anyone who can do it, but he did observe that in the last crisis he may have acted too soon. Referring to the purchases Berkshire made in the fall of 2008, Buffett said “Now it turned out that we would have been a lot better off if we’d waited four or five months to do similar things.”
The Berkshire chief also made some of his best deals toward the end of the crisis. For instance, in 2011 he bought $5 billion in preferred stock in Bank of America, yielding 6%, a deal that has netted the company more than $20 billion, including some investments in B of A later on.
Buffett may sense that better opportunities will present themselves as the crisis plays out. It’s only been about two months since the shutdowns started, so for struggling businesses liquidity is likely to be tighter a few months from now that than it is today.
Cautiously optimistic
Buffett retained his usual optimism about the American economy, saying, “We haven’t faced this exact problem. In fact, we haven’t really faced anything that quite resembles this problem, but we faced tougher problems. The American miracle, the American magic has always prevailed, and it will do so again.”
Indeed, over the long term, U.S. stocks and the economy have always bounced back and continued to grow — and over a five or 10-year horizon, the coronavirus may prove to be just a dip. But Buffett’s cautious tone was noticeable, and it’s clear that there’s a high level of uncertainty ahead.
Whether Buffett will go elephant-hunting this year remains to be seen, but for now the Oracle of Omaha seems content to keep his powder dry.
