Berkshire Hathaway’s (BRK.A) (BRK.B) growing cash balances continue to be a pain point for many investors. That frustration reached new heights following the significant market sell-off in March, a period when many expected Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) to act aggressively, most notably in terms of share repurchases.
With hindsight, we can see that repurchases were limited in the quarter ($1.7 billion), with that activity also taking place at prices north of $210 per Class B share – well above the lows in the quarter. That leaves many investors wondering: if Buffett and Munger are not going to take meaningful action in an environment like what we experienced in March, when will they?
That’s a fair question, and while I obviously can't speak for Buffett and Munger, I think we can make some reasonable guesses as to what they are thinking given their words and actions.
First, let’s look at the timing of some of Berkshire’s activity in the first quarter. Share repurchases were executed periodically at Berkshire Hathaway up until March 10. As a side note, remember that Buffett bought more Delta (DAL) in late February as well.
The following day, the NBA game scheduled between the Utah Jazz and the Oklahoma City Thunder was cancelled minutes before tip-off. I remember that night well, because it was when I first realized that this was no longer business as usual. I think the potential implications of Covid-19 became apparent to Buffett around that time as well, as was the case for many of us. As a result, a few weeks later, Buffett reversed course and was selling his holdings in all four of the major U.S. airlines.
Since then, Buffett and Munger have had access to real-time economic data through Berkshire’s collection of operating businesses. When companies reported quarterly earnings, individual investors caught a glimpse as well. Many of the companies that I follow, including Union Pacific (UNP), Starbucks (SBUX), Comcast (CMCSA) and Nike (NKE), reported results that seemed unfathomable at the start of the year and in many cases were worse than what they experienced during the financial crisis.
Now, maybe this is just a blip, with a return to normalcy shortly thereafter. But personally, I’ve become skeptical that this outcome is in the cards, and I think we can infer from Munger and Buffett's words that they feel similarly (or at least worry about that possibility).
Consider what Munger said in an interview with Jason Zweig of the Wall Street Journal in April:
“This is a time for caution rather than action… Nobody in America’s ever seen anything else like this. This thing is different. Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.”
Buffett said something similar during his introductory comments at the Berkshire Hathaway annual meeting of shareholders:
“I would say the range of possibilities on the economic side are still extraordinarily wide… I don’t know the consequences of shutting down the American economy.”
That perspective doesn’t seem to mesh with equity prices, with the S&P 500 in the green as of late July. Mr. Market seems to believe that the (hopefully) temporary shutdown of the global economy is manageable, or at least that the likelihood of an adverse outcome from here is quite low.
For those that agree with Mr. Market, I think it’s fair to say Berkshire missed its chance – and to take it a step further, that their ability to capitalize upon dislocation going forward has been permanently impaired due to factors such as the increasing willingness of governments to come to the rescue of (often debt-ridden) big businesses, both in terms of monetary and fiscal policy.
Here’s where I struggle with that conclusion. It doesn’t appear to me that the outlook (in terms of business results) has changed for many companies. I base that on the results companies have reported, along with what their managers have said about what they expect in the months ahead.
The reality is that nobody knows how bad the pandemic will be, either in terms of its global health impact or in terms of its economic impact. But it doesn’t strike me as implausible that this gets much worse. If that happens, Berkshire is still in a position to potentially engage in a very large deal (assuming opportunities arise).
As Buffett noted at the annual meeting, “We’re willing to do something very big. You could come to me on Monday morning with something that involved $30 billion, $40 billion, or $50 billion, and if we really liked what we were seeing, we would do it. That will happen someday.”
On the other hand, if it doesn’t get much worse from here, Berkshire already owns a large collection of operating businesses (most of which are dependent upon the success of the broader economic environment), as well as more than $200 billion in equity securities. Said differently, Berkshire investors already have significant exposure to the long-term prosperity of these businesses. A pandemic and recession that leads to a permanently lower run rate for the global or U.S. economy is not something that is likely to be a net positive for Berkshire shareholders.
You might argue that I’m talking out of both sides of my mouth – and I’d agree with you. I think Buffett and Munger have purposefully managed Berkshire’s affairs such that it reasonably participates when times are good but is also in a position to capitalize upon large, once-in-a-lifetime opportunities when they arise. Above all else, Buffett and Munger are focused on ensuring that Berkshire can handle anything that the world throws at it without relying upon the kindness of strangers. As Buffett said at the annual meeting:
“We don’t prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum… There are things that trip other things, and we take a worst-case scenario into mind that probably is considerably worse than most people do.”
This isn’t a new approach. Here’s what Buffett told shareholders in 2008:
“I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
People who disagree with their conservative stance should probably look for other companies to invest in as opposed to complaining about Buffett’s and Munger’s actions (or lack thereof). At the very least, it would be a better use of their time. Buffett and Munger will continue to do what they believe is in the best long-term interest of shareholders, regardless of what that means in terms of short-term public perception.
I’ll close with something else Buffett wrote in his 2008 letter:
“Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
Disclosure: Long BRK.B and CMCSA
Read more here:
- Disney Valuation, Part 5: Conclusion
- Why I (Almost) Sold Wells Fargo
- Berkshire Hathaway Meeting: 1998 Morning Session
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