As someone who has followed Warren Buffett (Trades, Portfolio) for over a decade and writes about him on a daily basis, I believe I have a good understanding of the Oracle of Omaha's investment strategy and views on the market. I also own shares in Berkshire Hathaway BRK.A BRK.B.
Like many of my fellow investors in Buffett's conglomerate, I was somewhat surprised to see his trading actions during the second quarter of 2020. Here are some of my thoughts on the topic.
Buffett's second-quarter moves
During the second quarter, Berkshire initiated one new position while adding to four existing positions.
Meanwhile, 18 separate stocks were either pared down or sold off in their entirety. Since the beginning of the year, Buffett has sold shares in 32 different companies.
I don't think any of this activity is based on his outlook for the economy or stock market. In the past, Buffett has made it clear that there are only two reasons he would ever sell a stock. The first is because something better comes along. The second is because the situation has changed.
Because Berkshire has $140 billion in net cash, it seems unlikely Buffett would have been selling stocks to free up cash during the second quarter. With that in mind, it seems likely he was selling these stocks because he believed the situation had changed.
I should clarify at this point that I am not trying to second-guess or read the thoughts of the Oracle of Omaha in this article. I am only offering some of my own thoughts and speculation on Berkshire's equity transactions during the first six months of 2020.
What stands out to me about these deals is that Buffett was selling so much while buying so little. Previous comments from the billionaire give us some guidance as to why he has been buying so little recently. Buffett has repeatedly said that he thinks the market is overvalued at current levels, and many stocks are trading at ridiculous valuations.
This might have pushed him to make decisions that he would not necessarily have made in the past. The recent sales suggest that this may have been the case.
Many of these deals do make clear sense because the situation had changed at companies like Wells Fargo WFC and the airlines. But we have to ask why Buffett bought airline stocks in the first place when he spent so many years warning investors about the perils of the industry.
We also have to ask ourselves and why he decided to buy financial companies such as Goldman Sachs GS and invest billions in Occidental Petroleum OXY. Buffett has always tried to avoid companies that spend more than they can afford and lack pricing power, i.e. companies like Occidental. He was offered a 10% return, but did he take it just because there were no other opportunities?
Goldman Sachs is a different case. This is one of Wall Street's best-known firms, and it has been a good investment over the years. My question is, why did Buffett buy and sell the stock so quickly?
All of the above points to the conclusion that with so much cash building up, Buffett may have felt compelled to deploy some of it. This is unlike him, and it is not something he would have done in the past. However, over the past decade, the world has changed dramatically.
For a start, Berkshire is a lot bigger today than at any point in history, and it is throwing off and more cash than any point in history. Buffett has more cash than he knows what to do with, a factor that may have lead the Oracle to make some bad decisions, in my opinion.
Another factor that may be leading Buffett's investment decisions is disruption. Technological disruption has changed the world dramatically during the past decade, and many investors have struggled to keep up.
Although it is easy to argue Buffett has lost his way with recent investments, it should be noted that he's been quick to sell in most cases. This has always been one of his most exceptional skills - the ability to sell up and move on when something does not work. What's more, while Buffett has recently made some bad investments, he's also made many great ones, including Apple AAPL. We need to keep that in mind when considering his recent moves.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Reviewing David Einhorn's Deep Value Stocks
- Looking at the Most Popular Hedge Fund Stocks of the 2nd Quarter
- Seth Klarman Exits Energy, Bets on Healthcare
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
