Warren Buffett (Trades, Portfolio) is arguably the world’s greatest value investor – and unquestionably the most famous. His decades at the helm of Berkshire Hathaway BRK.A BRK.B have made him rich and his company prosperous.
Buffett certainly casts a long shadow, and his market insights are considered second to none by many commentators, analysts and investors. Thus, when Buffett makes a big move or enacts a change of strategy, it often pays to pay attention. In August, it was revealed that Berkshire had shifted its long-running strategy of share buybacks and equity purchases in favor of building up its cash reserves. At the time, we observed that this should be taken as a warning sign for investors everywhere.
It appears that Berkshire is getting ready to profit from a potential crisis in the relative near-term. All investors should be paying attention, but Berkshire investors might have even more reason to look more closely. After all, past downturns have presented the conglomerate with its greatest opportunities. Another crisis could end up helping Berkshire get its mojo back.
The power of patience
As most money managers – and even many operating company executives – will attest, markets and investors rarely appreciate patience. The tyranny of quarterly earnings has led many operators and investment firms to optimize for the short-term.
Buffett is a different animal entirely. His firm personal grip on Berkshire allows him to make decisions at his own discretion. Moreover, he has earned a level of trust among many large-scale investors that gives him an unusual degree of free rein. As Buffett has opined on many occasions, this means he can afford to be patient and take a long-term view:
“The stock market is a no-called-strike game. You don't have to swing at everything – you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, ‘Swing, you bum!’”
The stock market has continued to flirt with all-time highs. Indeed, Buffett’s own favorite indicator of the relative value of stocks as a whole (i.e. whether they are overpriced or underpriced), has been flashing red for more than two years. During most of that time, however, Buffett has been buying stocks, seemingly in spite of the so-called Buffett Indicator’s emphatic signal of danger.
Cash is king
The thinking appears to have changed at Berkshire, since the first quarter of 2019 at least. Indeed, as Bloomberg reported in August after Berkshire released its second-quarter earnings report, the sprawling conglomerate has been building up its cash cushion:
"Berkshire sold $1 billion more worth of stocks than it bought last quarter, its biggest net selling since the end of 2017. Buffett was an active buyer of equities every quarter last year, including almost $13 billion in the third quarter alone. Buffett hasn't had a major acquisition in several years and has even pulled back on one of his newer ways to deploy cash, slowing down repurchases of Berkshire's own stock in the second quarter."
Buffett has said that, while he cannot know exactly when to buy securities, he does generally know whether to buy them. The decision to throttle back securities purchases in favor of padding the balance sheet was a clear warning sign to investors that Buffett sees a rockier road ahead. Indeed, as we opined in a September research note, Berkshire appears to be positioning itself for a crash (or at least a downturn).
Preparing to pounce
While the current market environment has not been terribly favorable to the value-oriented investor, there are signs of change in the air. Buffett is piling up cash rather than buying stocks or companies. Investors should take that warning seriously. Moreover, for followers of Berkshire, a strong cash position could prove a powerful weapon in the event of a downturn.
In the second part of this analysis, we will address the opportunities that Berkshire may be able to exploit in the event of near-term or mid-term crisis.
Disclosure: No positions.
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