“We haven’t done anything because we don’t see anything that attractive to do,” Buffett said.
As the world equity markets corrected almost 20% to 30% since the COVID-19 pandemic struck global economies, U.S. markets have eroded only 7% from its all-time high levels of February.
Bleak economic indicators should have traditionally dented market sentiment. Some of them are like record high unemployment of almost 33 million, drop of 8.7% in March retail sales and industrial output inching down by 5.4%.
On the contrary, funds are highly parked in industry leading stocks like Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), and Microsoft Corp. (NASDAQ: MSFT). History indicates that such heavily concentrated investments have not led to favorable results. However, it is likely that Americans have become positive too soon or the stocks have been over valued for years.
What Is Berkshire Hathaway Doing?
In his recent shareholder meeting on May 2, Warren Buffet said that despite having $137 billion in cash in Berkshire Hathaway Inc. (NYSE: BRK.A) he does not find anything attractive to invest in the current times. For the first quarter of 2020, the company’s net equity purchases stood at $1.8 billion.
Buffet advises that being cash rich at the moment is like having the biggest asset and doing nothing is possibly the best thing to do in the current market scenario. He further added, “This is a very good time to borrow money, which means it may not be such a great time to lend money.”
“Be fearful about stocks when others are greedy and greedy when others are fearful” is what Warren Buffet always said and is now depicting a changed philosophy. He has completely got rid of airline stocks from his portfolio even though they have lost 75% of their value since mid-February and are available at rocket bottom prices.
In April, Buffet unloaded $6.1 billion in stock, mostly airlines, which is unlike his moves of buying in market dips or crashes. In the overseas debt markets, Berkshire sold Euro-denominated bonds of approximate $1.1 billion value in early March. Also, in early April Berkshire offered $1.8 billion in multi-tranche debt offering in Japan.
Following is a view point of various investment avenues:
- Bonds: With high borrowing across the consumer segments, governments and companies, interest rates would soar thereby pushing bond prices lower. This may lead to a halt in the 40-year bond bull market.
- Oil: A very quick rebound in oil prices from $10 to $25 in the past few weeks makes it a very volatile investment.
- Agriculture, industrial commodities: Slumping to new lows they present an attractive buying opportunity. Corn prices are at multi-decade lows.
- Precious metals: Gold is presenting a strong performance while silver is lagging behind it.
- Real estate: With falling demand, real estate prices are estimated to be lower. High unemployment would lead to more rented opportunities rather than buying of solid assets.
One investment avenue which Buffet still feels safe is Index ETF (S&P 500 Index). They deliver average market returns with a small fee and less expertise. Index ETFs are highly secure with regards the diversification of stocks that the index would have and thus less risky for investors. If the broader economy is performing well it would thereby generate attractive returns from the investment.
Other Highlights Of The Shareholder Meet
Commenting on buyouts, Berkshire Hathaway’s vice chairman Charlie Munger said that unlike the recession times, the company has not been receiving any calls for buyouts or begging for rescue capital. This is mainly due to the uncertainty that COVID-19 has created and left everyone confused what the economy’s next phase would be. Also, government aid is sufficient enough for them to look at sources outside.
Buffet continued to defend what he believes about buybacks as he sees it as the most efficient way of distributing cash to shareholders. The buybacks have faced extensive criticism as the five biggest airlines in U.S. used 96% of their free cash flow on buybacks over the past decade and then went on to request for bailouts and grants amid the coronavirus outburst.
“It’s very politically correct to be against buybacks,” Buffett said. “There’s a lot of crazy things said on buybacks”.
The U.S. lawmakers seek to pass a coronavirus stimulus bill that temporarily bars companies that receive government bailouts from buying back their stock.