I am going to respond to and interpret Warren Buffett's comments presented on Saturday at the 2020 (virtual) Berkshire Hathaway (BRK.B) Annual Meeting.
"We don't prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum... We have not done anything, because we don't see anything that attractive to do... Berkshire's share price is not significantly less expensive than it was when we purchased stock higher... When the facts change, I change. What do you do sir?"
- Warren Buffett (at Saturday's Berkshire Hathaway Annual Meeting)
Warren, at best, painted a picture of caution, at worst, he is downright bearish - let's compromise and call him a Baby Bear.
In the first 60 minutes of the virtual Annual Meeting, Warren outlined his preamble, describing an historical perspective and recalled how fantastic the investment gains in the U.S. has been. To me, this seemed almost an attempt to keep attendees from panicking from his uncharacteristically sober tone that followed.
At the core of his concern is the belief is that Covid-19 is something like a 10+ sigma event (for the airline stocks - that he completely liquidated - it was closer to a 25 sigma event) - that will have unknowing and adverse ramifications for economic and corporate profit growth around the world. (For those of you who don't speak statistical jargon, a 10 sigma is a random event drawn from the Gaussian distribution that happens to be more than 10 standard deviations ("sigmas") away from a normal distribution.)
To this observer, on Saturday, we witnessed a classic example of a veteran investor recognizing that when risks are hard to quantify, its best to err on the side of conservatism (and not add to equities). Rather, saving money for a rainy day, is preferable.
October 2008 vs. May 2020
In October, 2008 Warren aggressively purchased stocks and underscored this in a well distributed editorial (written a month after Lehman's bankruptcy) in the New York Times, "Buy American, I Am":
"In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So ... I've been buying American stocks."
By contrast, in this cycle, Berkshire is husbanding cash (an almost antithetical posture compared to 12 years ago during The Great Decession of 2007-09) -"Our position will be to stay a Fort Knox."
Unlike then, Warren believes that cash (today), with all its "optionality," could become an increasingly attractive and scarce asset.
In other words, "the world has changed" (his words!) and given the rising uncertainties, one dollar in cash today maybe worth more than one dollar in the next 1-2 years.
Let's Call Buffett a Baby Bear
Though Warren says he would never bet against America, he has not bet in favor of America in his stock activity this year. In the first quarter of 2020 Berkshire purchased $1.85 billion of equities (net) and only bought back $1.62 billion of Berkshire stock.
In April, Berkshire sold (on a net basis) nearly $6.5 billion of equities - despite the precipitous drop in equity prices. He repurchased no more Berkshire stock and specifically stated that though Berkshire's share price continued to drop, the relative merit of buying more stock in April was less than apparent to him compared to when he was buying higher in the previous few months.
Though Warren spent over 60 minutes discussing the virtue of investing in our country over the last 2 1/2 centuries, there is only once conclusion: Warren Buffett is not bullish, near (and maybe intermediate term) of U.S. equities, of the global economy, nor of Berkshire Hathaway stock.
He specifically called out energy, retail, airlines and non residential real estate as industries that have been destabilized and will not likely resemble the past in terms of growth and profitability.
Berkshire Shares Are A Stay Rich Investment Not A Get Rich Investment
Warren's comments and Berkshire Hathaway's relatively weak results over the past one year, three year, five year and seven year investment period underscore my concerns expressed in the tone and in my line of questioning of Charlie Munger and Warren at the 2013 Berkshire annual meeting.
My conclusion back then, seven years ago, was that Berkshire Hathaway was too large to succeed on a market and economic basis (both relative to the S&P Index and US GDP)
Let's not forget that, historically, Berkshire's outperformance over the past 50-plus years has been spectacular. However, sustaining that growth is becoming more difficult to achieve. Buffett noted in his 2007 annual letter that, "Berkshire's past record can't be duplicated or even approached." And in almost every letter since that (as well as in Saturday's meeting), he has uttered the same theme.
As I mentioned in a prelude to a question about the ability of Berkshire to persist in outperforming the markets while Warren continued to expand the size of the company, I observed to Warren seven years ago: "In the sole year of the last four (in 2011) that Berkshire succeeded in outperforming the share price of the S&P 500, it did so by a mere 2.5%. Even five years ago (in 2008), when performance was strong on a relative basis, Berkshire still recorded a negative return of -9.6% (while the S&P dropped by a staggering -37%). Explain how Berkshire can persist in outperforming the markets while you continue to expand the size of your company?"
Here was my specific, and first, question in 2013 that I asked Charlie and Warren as I sat on the dais of that year's Berkshire Hathaway Annual Meeting - their answers follow:
Q: As it is said, Warren, "Size matters!"
In the past, Berkshire bought cheap or wholesale -- for instance, Geico, MidAmerican Energy, the initial Coca-Cola (KO) purchase and Benjamin Moore. Arguably, your company has shifted to becoming a buyer of pricier and more mature businesses -- for instance, IBM (IBM), Burlington Northern Santa Fe, Heinz (HNZ) and Lubrizol, which were done at prices to sales, earnings and book value multiples well above the prior acquisitions and after the stock prices rose.
Many of the recent buys might be great additions to Berkshire's portfolio of companies, however, the relatively high prices paid for these investments could potentially result in a lower return on invested capital. In the past you hunted gazelles, but now you are hunting elephants.
To me, the recent buys look like preparation for your legacy, creating a more mature, slower-growing enterprise. Is Berkshire morphing into a stock that has begun to resemble an index fund that is more appropriate for widows and orphans rather than past investors who sought out differentiated and superior compounded growth?
In the past, you have quoted Benjamin Graham, saying "price is what you pay -- value is what you get." Are your recent deals and large investments bringing Berkshire less value than the deals done previously?
A: Warren admitted that Berkshire won't grow as rapidly in the future as it has in the past but it will still generate a lot of incremental value. "We think we will do better than the giants of the past," he said. Charlie chimed in and said much of the same. Warren then exclaimed, "Doug, you haven't convinced me to sell the stock, but keep trying!"
The Man, The Myth, The Legend
I want to close out this column on a more upbeat note.
Warren Buffett is a remarkable 89 year old who spent nearly five hours in a non-stop display of coherent and thoughtful analysis - providing a steady stream of investing gems and pearls of wisdom that most 40 year olds would find difficult to duplicate.
For over six decades, The Oracle of Omaha has employed a value approach to investing that has catapulted Berkshire Hathaway into the sixth largest company (as measured by its near $500 billion market capitalization) in the S&P Index.
At over $70 billion, Warren Buffett is the fourth wealthiest person in the world.
These are two very good reasons to heed The Oracle's extremely cautious words on Saturday.
(This commentary originally appeared on Real Money Pro on May 4. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)