Stock Talk #13: The Oracle Speaks
It’s rare that interesting market news drops on a Saturday, but Warren Buffett held court and did a few hours of Q&A at the 2020 Berkshire Hathaway Annual Shareholders Meeting yesterday. The whole thing is worth watching and can be found here. If you want the cliff notes, that is the subject of today’s Stock Talk.
As Usual, Headline are Misleading and / or Flat Out Wrong
A number of headlines I read focused heavily on:
– Berkshire “losing” $50 billion in the first quarter
– Buffett selling out of airlines
– Buffett holding a ton of cash
The former is completely misleading and wrong, the latter two in my opinion miss some more interesting parts of the shareholders meeting.
On the first point – Berkshire’s operating profit actually increased, whereas investment and derivative losses mostly realized on paper are driving the $50 billion “loss”.
Berkshire is required to report unrealized losses, so the mark-to-market of equities Berkshire owns is (mostly) the reason for this “loss”.
To simplify, an example. Berkshire owns a ton of AAPL. If Apple’s stock price goes from $320 to $280 from quarter beginning to quarter end and Berkshire owns one share, they’re required to report a $40 loss.
To be fair, some of these losses were realized – Berkshire sold all its airline positions down to zero, which brings me to the second headline most reports focused on. The Oracle was asked why he did this numerous times over the course of the Q&A, and I think his answer is simple and makes sense. Airlines are a less valuable investment going forward for several reasons:
– All airlines ordered aircraft under the assumption of increased global travel demand through the end of 2019 and beginning of 2020. Much of this demand will likely never be realized, meaning there is going to be a huge supply overhang of aircraft for the foreseeable future. If you’re an airline, you now have unutilized assets you paid top dollar for
– Airlines are going to take on more debt or sell equity to survive. Both hurt equity value. A a dollar to the debt is a dollar that has to be paid before the equity can have it. More shares mean less value per share, all else equal,
Buffett admitted the original thesis for owning airlines is no longer true and it’s a mistake to own them now. Notably, Buffett reiterated he hates holding cash and wants to deploy when an opportunity presents itself.
Buffett Is Long America and Opportunistically Looking to Get Longer
The idea that Buffett is holding a lot of cash is in my opinion only really true in absolute numbers. As a percentage of the private companies Berkshire owns 100% of and the public companies it has stakes in, cash is ~<25% of the total.
I got the sense multiple times from Buffett’s statements throughout the call that he is eager to put this money to work, but Buffett wouldn’t be Buffett without the incredible discipline and patience that has allowed him to acquire deeply discounted assets. He suggested early in the call that the Fed’s historic actions had prevented a liquidity crisis in the market and therefore resulted in few opportunities for Berkshire to buy deep discounts. As to why he didn’t purchase more of his own stock, the Oracle suggested the discount relative to Berkshire’s intrinsic book value was only historically large for several days in March and that discounts now are roughly equal to where they were in 2019, taking into account a decreased Berkshire book value as a result of the C19 crisis.
That said, I think we are in the early innings of a several month recession and that Berkshire is playing the long game. Interestingly, Buffett said his market timing was terrible on the historic Goldman and BAC warrant deals he made during the 2008-9 crisis; had he bought 4 months later, he would’ve got better pricing. Clearly, there’s some thinking within Berkshire that there will be a better time to buy.
Whether Writing Insurance or Buying Stocks, Right Value at Right Price
Buffett was asked during the Q&A if he’d be willing to write insurance on future pandemics and gave a hearty yes (with the caveat that the price had to be right). Berkshire wrote a ton of insurance after 9/11 insuring similar events. I bring this up to display a quality I think (along with a ton of others) that makes Buffett the best capital allocator in the history of mankind: he’s willing to own any risk at the right price.
There is always some price where an asset is below its intrinsic value, and I think Buffett is just supernatural at finding this price. Just because he hasn’t bought anything since C19 started doesn’t mean he will not buy anything over the next few months. Think about the aforementioned warrant example; by any measure, Berkshire hit the ball out of the park on that deal, yet they missed bottom-ticking the market by four months. Patience is a virtue, and Buffett has it in scores.
As per usual, the Oracle said at least two or three times that betting against America over the long-term has never worked out for anyone. Owning a cross-section of American businesses for several decades works. I am certain Buffett will be a net buyer of stocks over the next few months and almost certain we will see Berkshire make a splashy acquisition before this is all over.
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Onto more Sunday coffee,
Brostoff
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