Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) held its annual shareholder meeting on May 1, 2021. As always, it provided a fascinating opportunity to hear chairman Warren Buffett (Trades, Portfolio) and vice-chairman Charlie Munger (Trades, Portfolio) respond to shareholder questions.
One section of the meeting that really stood out to me was Buffett's views on the current economic situation, in which vast amounts of fiscal and monetary stimulus are being used to catalyze growth. A question put to Buffett alluded to the possible negative effects of such stimuli, particularly the prospect of higher inflation prompted by fiscal and monetary stimulus and whether such policies would prove to be a good idea in the long run. In response, Buffett said:
"We've learned a lot of things we thought before weren't true, but what we haven't learned yet is whether what we're doing now is true. The best thing to do is recognize you don't know and proceed in a way where you get a decent result, no matter what happens. That's what we try and do at Berkshire Hathaway."
Predicting the future
In my view, Buffett's response is extremely insightful. The world currently faces a set of challenges that it has never previously experienced. The policy response from the government and the Federal Reserve appears to have aided economic growth in the short run. However, it is too soon to know whether major stimulus programs will have consequences such as inflation given the deflationary pressures that the Fed expects to balance things out, or if they will prove to be a positive or negative response to current circumstances.
As ever, it is impossible to know how the economy will perform in future. There are a large number of variables that can influence the performances of the economy and stock market, but which are unpredictable. Therefore, as Buffett stated, adopting a strategy that can produce an attractive result in the long run, rather than trying to second-guess the economy's prospects, could be the most logical approach for value investors at the present time.
A sound investment strategy
In my opinion, a sound strategy to adopt at the present time is likely to focus on holding stocks that are fairly priced. The current bull market has prompted high valuations among some sectors and companies that may not factor in risks facing the economy. As such, reassessing the valuations of existing holdings, and ensuring new purchases are fairly valued, could be a prudent approach.
In addition, following Buffett's lead and holding a significant proportion of a portfolio as cash may allow you to capitalize on lower valuations in future. Recent fiscal and monetary stimulus has aided the economy's performance in the short run. However, it may produce unwanted effects over the long run that cause investor sentiment and company performance to weaken.
After all, major stimulus packages are very unlikely to have brought the market cycle to an end. This could mean that the seeds of the next bear market are already being sown. Investors who remain largely invested in equities, but have access to cash should stock prices fall, may be in the most coveted position to obtain what Buffett described as a "decent result."
Disclosure: The author has no position in any stocks mentioned.
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