Warren Buffett and Berkshire Hathaway
Time to move on?
In the last two reports, we have been talking about Berkshire Hathaway and Warren Buffett. It baffles everyone the amount of money Berkshire Hathaway lost in the first quarter of this year on account of the pandemic. 54 billion dollars is a lot of money to lose. But then money is relative. You have to be Berkshire Hathaway to lose that kind of money and still be in business. We don’t have to worry about it as we don’t have that kind of money.
Warren Buffett is known in the markets as the emperor of value investing. His mantra of investing has done him well for the last 55 odd years. His style of investing has averaged an annual growth in book value of 19% to its shareholders since 1965 compared to the S&P 500 growth of just under 10% including dividends for the same period.
The company employs close to 400,000 people. It is a multinational conglomerate holding company of more than 90 companies and significant minority holdings in many US public companies. They are also the world’s largest underwriters of (re)insurance contracts.
Warren Buffett who was opposed to being invested in the airline industry for almost 35 to 40 years had a change of mind about 5 years back and invested in the major US airline carriers, namely United Airlines, Delta Airlines, Southwest Airlines and American Airlines. Since the pandemic, he has gotten out of all those investments at a loss and has admitted that those investments were a mistake.
The annual meeting of Berkshire Hathaway is considered as the biggest investment conference of the year. Every year about 45,000 people congregate in the not so big city of Omaha in Nebraska, the hometown of Warren Buffett. The population of the city goes up by about 10% during these get together. The gathering is popularly known as the ‘Wood stock of capitalists.’ For many value investors, his followers, and fund managers, it is almost a yearly pilgrimage to attend this conference. This year due to the pandemic it was a virtual conference and Buffett spoke for about four hours over the weekend.
As you all will know, Berkshire Hathaway is a unique fund. Though it is recognized in the investment community as an insurance company, it is the biggest hedge fund in the world. Warren Buffett’s approach has been to collect huge insurance premiums and invest those in the stock markets. Currently, he is sitting on cash equivalents of 137 billion dollars and does not see any compelling opportunities in the markets to buy into.
This is surprising to many value investors. What could be the real reason?
One is probably he is seeing much bigger fall in the markets to come. The other thing is he is probably fearing much bigger insurance payouts due to the pandemic and he himself doesn’t want to be caught up in a liquidity crunch. The insurance business has unknown liabilities. The amount of litigation that is going to come out of this pandemic is likely to be huge and the cost of defending them could be a massive expense. In fact, he is raising more money through zero coupon bonds in Japan and Europe as well.
During the GFC, he made some great investments in Goldman Sachs, Bank of America, and General Electric. The Fed at that time was behind the curve. In many cases, he acted as the lender of last resort and bought into some good investments.
The Fed had learned a good lesson through the GFC and in this situation the government and Fed acted quickly with decisive intervention. The Fed’s actions eliminated those opportunities that an investor like Warren Buffett could have exploited.
The government was more focused on stimulus than containing the pandemic. If it were the other way round, probably US would not have been in the mess that they are now. We are digressing from the topic. Let’s get back to Buffett.
Warren Buffett is an honest and honourable man. Has his style of value investing become less relevant in the new world that we are in now? I think it has. Of the public companies that he holds the biggest holding is in Apple. He holds Amazon too but not to the size of what Berkshire Hathaway should. Bill Gates is his closest friend and Microsoft was the best performing large IT stock last year. Think Buffett is not invested in Microsoft as Gates is on the board of Berkshire Hathaway. With so much cash, it is still probably not late to get into the future leaders of the stock markets which we think will be the new generation large cap stocks.
I think a new level of thinking has to shake up Berkshire Hathaway or perhaps a change of leadership?
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.