Finance

Warren Buffett’s Berkshire Hathaway swung from extreme caution to a flurry of deals in 6 months. We asked a bunch of experts to analyze its shifting strategy

  • Warren Buffett was gravely concerned about the pandemic during Berkshire Hathaway’s annual meeting in May.
  • The famed investor’s Berkshire Hathaway conglomerate sold its stakes in the “big four” US airlines and slashed its financial holdings in the second quarter.
  • However, it announced more than $19 billion of investments in the third quarter, including a $10 billion deal to buy natural-gas assets, a $6 billion wager on Japanese trading houses, and an uncharacteristic bet on Snowflake’s IPO.
  • We asked a bunch of Berkshire scholars and investors to reflect on Buffett’s comments six months ago and analyze how his strategy has evolved since then.
  • Visit Business Insider’s homepage for more stories.

Warren Buffett, hunched over a microphone on a stage overlooking a dark, cavernous, and virtually empty hall, cut a forlorn figure at Berkshire Hathaway’s annual meeting in May.

Tens of thousands of Berkshire shareholders usually descend on the billionaire investor and Berkshire CEO’s hometown of Omaha to attend the gathering, one of the most significant events on the investing calendar. They mingle with other investors, peruse the wares of Berkshire-owned businesses such as See’s Candies and Nebraska Furniture Mart, and participate in activities including a foot race and a steak dinner.

Buffett wanders around the room, taking selfies with fans and cracking jokes to the crowd of reporters and groupies in his wake. The highlight of the weekend is when he and his business partner, Charlie Munger, field questions from shareholders and hold forth on a wide range of topics.

This year’s meeting was almost unrecognizable. The pandemic ruled out a mass gathering and forced Buffett to address his shareholders remotely via a Yahoo Finance livestream.

Munger, at the ripe age of 96, didn’t risk flying in from California. Apart from a skeleton crew of production and venue staff, Buffett only had one of his deputies, Greg Abel, and a glass of Coke for company.

Buffett underscored the devastating impact of the pandemic in his speech that day. He described it as a “flip of the switch” in the American psyche and compared the US economy’s shutdown to pulling a train off its tracks and laying it on the side of the rails.

The investor tried to soften his dire message by emphasizing the country would ultimately prevail. “Never bet against America,” he said.

Critics pounce

Buffett’s cautious tone, coupled with the revelation that Berkshire added $9 billion to its $128 billion cash hoard in the first quarter instead of snapping up bargains when pandemic fears tanked markets, sparked a fierce backlash from several commentators.

After all, Buffett famously plowed billions into Goldman Sachs and General Electric at the height of the 2008 financial crisis, as well as Bank of America in 2011.

“We have not done anything because we don’t see anything that attractive to do,” the investor said in May about the dearth of deals. He highlighted the Federal Reserve’s swift interventions to shore up markets as one reason for the lack of opportunities.

After stocks rapidly rebounded, day-trading celebrity David Portnoy dismissed Buffett as “washed up” and said, “the old man lost his fastball.” Investor Ken Fisher suggested he was slowing down in old age, while hedge-fund manager Bill Ackman dumped his $1 billion stake in Berkshire.

Fund manager Bill Smead said Buffett and Munger were “sidelined in fear” during the crash. Even President Trump joined in, proclaiming that Buffett “made a mistake” when he sold his airline positions in April.

Berkshire eventually responded by making multiple bets in the third quarter. We asked investors, academics, and other Berkshire experts to reflect on Buffett’s comments in May and analyze his company’s biggest moves over the past six months.

Navigating a crisis

At the annual meeting, Buffett signaled that his focus was on weathering the pandemic, not profiting from it.

“I would never take real chances with other people’s money under any circumstances,” he said.

The investor’s cautious approach underlined the immense responsibility he feels to his shareholders and his awareness of how public perception of Berkshire can affect its business.

“Buffett is managing not only an investment fund but a sprawling conglomerate at the heart of which is a vast array of insurance operations,” Darren Pollock, the portfolio manager at Cheviot Value Management, told Business Insider.

A strong balance sheet and spare cash help its insurers appeal to customers, he continued.

“Berkshire’s strong finances are a strategic advantage and Buffett’s desire to hold extra cash at the expense of perhaps achieving a little more in investment gains is rational,” Pollock added.

Buffett’s conservative strategy also reflected the specific nature of the crisis.

“If the situation had been purely a financial panic, I’m sure he would have thundered in with elephant guns blazing, knowing that all such panics subside sooner or later,” Brian Gongol, who has closely followed and blogged about Berkshire for more than a decade, told Business Insider.

“But this was a case where the real world was dragging the real economy behind it, and the real economy in turn was dragging the market into a hole.”

Ditching the airlines

Buffett dropped a bombshell during the annual meeting: Berkshire had dumped its stakes in the “big four” US airlines — Delta, United, American, and Southwest — in April.

“Our airline position was a mistake,” the investor said. “Berkshire is worth less today because I took that position than if I hadn’t.”

Buffett sold the holdings because he was unsure whether passenger demand would rebound in the next two or three years. He said if it didn’t, carriers would be lumped with surplus planes and forced to slash prices.

The Berkshire boss also painted a picture of airlines suffering steep losses and incurring rising debts, repaying government loans out of their earnings and handing over equity in exchange for aid, and issuing shares to raise money at the cost of diluting existing stockholders. 

“The outlook for that industry at that time was very grim,” David Kass, a finance professor at the University of Maryland, told Business Insider. “A full recovery would require a safe and effective vaccine, and it was unknown how long that would take.”

“Investors also feared the US Treasury would dilute the equity of the major airlines by issuing warrants in return for loans or grants, and at least one major airline was viewed as a bankruptcy risk,” he added.

Buffett may have decided there were simply too many factors outside of his control, Gongol said.

“When the gods and the government hold your future in their hands, it’s a bad time to be a shareholder,” he added.

Selling stock and conserving cash

Buffett remained conservative with his spending in the second quarter. Berkshire sold $12.8 billion worth of stock on a net basis, as it dumped the airlines and took a knife to financial holdings such as Wells Fargo, JPMorgan, and Goldman Sachs.

However, the conglomerate loosened the purse strings in the third quarter, announcing more than $19 billion worth of investments.

It struck a $10 billion deal to buy most of Dominion Energy’s natural-gas assets in early July and plowed $2.1 billion into Bank of America stock over 12 consecutive trading days to August 4. It disclosed 5% stakes in the five biggest Japanese trading houses a few weeks later – a roughly $6 billion outlay over the preceding 12 months.

Buffett’s company also bought $735 million of Snowflake stock when the cloud-data platform went public in September and agreed to hand Scripps $600 million in return for preferred stock and a warrant to buy $300 million worth of the broadcaster’s common stock at a fixed price in the future.

Those are minor bets relative to Berkshire’s robust cash generation and its $147 billion cash pile at the end of June, but experts view them as worthwhile.

“If he can keep deploying cash profitably in medium-sized deals, that’s better for Berkshire than letting the cash pile up,” David Merkel, who writes The Aleph Blog and runs Aleph Investments, told Business Insider.

“He’s got enough money to do something big, but I think his standard for doing a really big deal would have to be at the level of a ‘chance of a lifetime,'” Merkel added.

Buffett won’t be too stressed about stockpiling cash, as bargains are rare at the moment and there will be a better time to buy.

“Building cash levels is not a terrible idea,” Tyler Hardt, the founder and portfolio manager of Pelican Bay Capital Management, told Business Insider. “There is always another ‘at bat.'”

Barrick and Snowflake

Two of Berkshire’s bets this year, Barrick Gold and Snowflake, warrant special attention because they’re so unusual.

After all, Buffett famously prefers productive assets such as businesses to gold, and has avoided lossmaking, aggressively valued technology stocks and IPOs for most of his career.

Berkshire likely backed Barrick Gold because of its stellar management, shrinking debts and operating costs, and the prospect of rising gold prices boosting its profit margins, Pollock said.

“Paying a reasonable price for these improving metrics is pure value investing, in this case, executed by either Ted Weschler or Todd Combs,” he added, referring to Buffett’s two portfolio managers.

Meanwhile, Berkshire has more than doubled its money on its Snowflake bet already, but it’s too soon to assess whether it’s a sensible long-term investment, experts said.

In any case, the Barrick and Snowflake wagers show Buffett and his team aren’t afraid to break from tradition and experiment with new types of investments.

“Combs and Weschler have substantially extended Berkshire’s ‘circle of competence,'” Kass said, invoking Buffett’s famous strategy of only investing in what he understands.

However, the risk is Berkshire strays too far from Buffett’s tried-and-tested principles, gets caught up in speculative fervor, falls victim to the greed which the investor once fittingly described as a “super-contagious disease,” and ends up getting burned.

“Buffett was right to be cautious, and should be even more cautious now,” Hardt said.

“There are clear signs of speculative excess,” he continued, pointing to the boom in “blank check” companies, IPOs, and retail investing, as well as sky-high valuations. “All the devils are here.”

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