What Would Warren Do?

While it is true that Buffet has reduced a number of holdings it is important to understand that the overall conglomerate that is ‘Berkshire Hathaway’ holds both substantial businesses within itself as well as still retaining exceptionally substantial positions in direct share holdings.

In other words, no, he isn’t cashing out of shares altogether. Far from it.

The shares Buffet has reduced are quite logical, especially from the US perspective; predominantly airline & travel stocks, areas of consumer discretionary & manufacturing, oil/petrol companies as well as a number of underperforming financial stocks and banks.

However, he began the process of shaving some of the holdings earlier in the year and back in 2019; in other words, taking profits throughout the period without it solely from a COVID19 reaction.

Rather than an exit from the market, most are reductions of between 0.4% - 5% only. As an example, his General Motors holding is still around 75million shares worth approx. US$1,551,872,000 (a reduction in holdings of just 0.4%), with any media comments that he was ‘getting out of GM’, being a gross over statement.

Yes, there are some shares he has taken an axe to, such as selling 84% of his holding in Goldman Sachs (though this process started ¾ through 2019, so it wasn’t COVID19 related but obviously something else he didn’t like) and 100% from companies like Travellers (insurance), Phillips 66 (Oil) and all his airline holdings. As mentioned before, logical given the current situation, especially in America where the economic and company dynamics are very different.

Interestingly regarding exiting his airlines positions which he only went into in 2016, as reported in the AFR earlier this month, in years gone by “He famously once remarked that if a capitalist had been present for man's first flight at Kitty Hawk he would have shot down the flyer and saved everyone a lot of money”. "Airlines are terrible businesses because they always need capital, have huge fixed costs and strong labour unions, and relied on turbulent commodity prices. So you would think Buffett would be the last person to pile into airlines and then retreat four years later nursing losses”.

Part of Warren’s current problem, (not that any of us will feel any great pity for him over it), is that the companies and businesses he invested in over the years have returned so much cash yield in profit that he is literally sitting on a mountain of it. US$137Billion of it at last count. We know he is quite picky where he invests, in his own words, ““We haven’t done anything because we don’t see anything that attractive to do. The companies we were getting calls from, after the Fed acted, a number of them were able to get money in the public market frankly at terms we wouldn’t have given.”

“Now that could change very quickly or it may not change,” he added, referring to Berkshire’s lack of targets.

We all know journalists and reporters are paid to make headlines and sell stories, even the financial reporters, so if Warren Buffet is selling any shares at all, they will push that angle for all it is worth.

When analysing Buffet’s actions, we take a much more considered approach than the freelancing reporters, as you would expect. We definitely do look at the actual information on Berkshire Hathaway and Warren’s talks, but also then utilise our own research and lens from an Australian perspective, which can be vastly different than the USA or other countries, especially considering we have a fair proportion in our portfolios in domestic equities.

A couple of aspects to bear in mind, especially from that Australian outlook:

  • The billions in both Federal and State stimulus measures (approx. $320bn from the Commonwealth, $11.8bn from the States and $105bn in RBA-government lending) are just starting to feed out into the economy with progressively more over the following months. This also does not include other financial measure taken from institutions like the banks on deferring home loan repayments and extending terms and payments for commercial loans, and rental relief measures being implemented or the superannuation ‘early access’ measures.

  • The recently publicised $60Billion mistake in the stimulus estimates by the Aust. Government was actually to our benefit; they overestimated how bad things would get, so in reality have an extra $60Bill still in reserve to use as needed.

  • On 28 May, the  Reserve Bank governor Dr Philip Lowe indicated that Australia is in a better economic position than expected which may be the reason for the $60Bill overestimate. He also stated that negative interest rates are extraordinarily unlikely, though he cautioned the worst may not be behind us especially if a further outbreak occurred, which is why the newfound surplus was a major benefit.

  • Worldwide, similar extraordinary stimulus steps are being taken with trillions of dollars for all advanced economies, with payments and cash starting to assist those countries, their economies and businesses and companies within them, which ultimately assists their share markets recover over the medium term.

  • As per a Vanguard Global Fund article recently: “We've seen hundreds of policy responses around the globe in the last two months, both monetary (through the purchase of securities to keep markets liquid and functioning) and fiscal (through cash payments to help keep individuals and businesses afloat). In retrospect, policy responses that addressed the global financial crisis may seem like a useful dress rehearsal. An index of financial conditions that we watch closely has stabilized much more quickly than it did during the global financial crisis, a testament to the depth, breadth, and speed of policy responses.”

  • The cascading effect of this money being disseminated and spent throughout these economies is only beginning to be felt, and yet the share markets have been relatively firm and trending up - volatility and daily fluctuations don’t indicate a market is unstable, just that it is still trading based on a lot of variables, including a measure of sentiment.  

  • In Australia the toll of COVID19 cases have not been significant, especially in consideration of the initial projections and fears. While it is a fair comment there could be a further outbreak, it is also true that ‘fear casts a long shadow’, and that any further outbreaks are unlikely to cause as much fear, confusion and concern as earlier this year as most people (and institutions) have come to grips with what it means. This in turn is likely to have less subsequent impact on markets – for example ‘MERS’ and the ‘Swine Flu’ still exists today and causes deaths yearly, but are no longer ‘news worthy’, even to the extent that the ‘Swine Flu’ is now considered a normal, seasonal flu strain.

  • The unemployment concerns, especially in Australia, are easing in no small part due to the ‘Jobkeeper’ & ‘Jobseeker’ government payments but also as restrictions lift and small businesses are rehiring staff or allowing more staff to return to their offices or workplaces with strict hygiene guidelines.

  • Oil prices have firmed up a little, which is good for the market but also conversely, as they are still quite low and likely to remain so for a while yet, it is also good for those businesses that have any costs associated with freight, transport or travel during this period.

  • It is an unfortunate fact that a number of businesses won’t survive and reopen for whatever individual reasons. However, as per the normal business cycle, this then typically represents an opportunity for others; whether it is a prime café location in Sydney becoming available or an existing larger business gaining further market share, albeit more slowly than normal, even these activities will increase the overall economic recovery process.

None of the above indicates that we are not taking COVID19 and its resulting economic impact seriously; to the contrary, we’re accessing as wide a variety of expert information and opinion from as wide a field as commercially sensible, including medical, scientific, geopolitical as well as economic and financial, to ascertain our own viewpoints.

However, we’re also cognisant to ensure that where we sensibly see a potential to place our clients in a better overall financial situation for the long term, that we don’t miss the ability through any ill-defined fears or sentiment that may be in the public domain.

Brad Stewart