With share markets around the world now solidly in bear market territory, there is one guy who is getting plenty of sleep at night.
Legendary investor Warren Buffett has once again shown why he is regarded as the world’s best investor by entering into this crisis with an astonishing US$128 billion (A$207 billion) in cold, hard cash waiting for the right investment.
That is by far the biggest cash pile the master investor has ever accumulated and it puts him in the box seat to take advantage of any panic selling and distressed situations that arise.
Ready for a big buy but it never arrived
Until now Warren Buffett has been looking for what he described as an “elephant-sized acquisition” but everything he looked at was far too expensive.
That is no longer the case after the share market dramatically and suddenly went on sale and the only thing that has disappeared is the hordes of share market analysts who poked fun at Buffett as an old fuddy-duddy who didn’t know what he was doing amassing such an enormous cash pile.
Once again, Buffett’s enormous reserves of patience and preparation and his ability to ignore the noisy critics has been rewarded and you can be sure of one thing – the old master will play this share market crisis like a Stradivarius.
GFC deals earned Buffett at least US$10 billion in profits
The last time this happened during the global financial crisis when he also had a massive cash hoard, Warren Buffett effectively set up his Berkshire Hathaway as a lender of last resort for the entire US banking sector.
And boy did that work spectacularly well – many of the big banks came to Buffett with spectacular deals which effectively guaranteed Berkshire Hathaway at least double digit short term returns and on top of that offered plenty of upside through exposure to the bank’s share price once they were out of danger.
Almost as soon as each of these banking deals were announced, they pushed up the bank share prices and made plenty of instant money for Berkshire Hathaway shareholders.
It was a win-win all around except that true to his mantra to be greedy when others were fearful and fearful when others were greedy, Buffet and his adoring shareholders did by far the best out of the deals.
Some of the companies that did around US$21 billion of Buffett deals last time include Mars, Goldman Sachs, General Electric, Swiss, Dow Chemical and Bank of America.
Profit from those deals ended up adding at least US$10 billion to the bottom line for Berkshire Hathaway shareholders and this time around the profits could be much higher.
Amazing deals will be running across Buffett’s desk right now
It is a little bit early to see exactly how Buffett will profit out of this crisis but you can bet that some really interesting offers and deals are flowing across his desk right now.
It wouldn’t surprise if he ends up supporting a struggling travel group or cruise line just before the fog lifts and the tourists return – who knows, perhaps Buffett might even finally get over his long running allergy to investing in airlines.
Then there are the acquisitions that will be in the works – deals both large and small that have suddenly become cheap enough to come to the attention of Buffett’s famous value investing nose.
On top of all of that, there will be opportunities to top up on existing Berkshire Hathaway investments at rock bottom prices and perhaps acquire some holdings in new companies now that prices have finally become “reasonable’’.
We can all learn from Buffett’s patience
The most important thing all investors can learn from Buffett is the benefit of patience – of not acting in haste just because you feel the need to be “doing something’’ and also the benefit of keeping a good supply of dry powder ready for that short period of time when opportunities all of a sudden start to arrive thick and fast.
Fear of missing out is a problem that Warren Buffett overcame long ago but it is still a surprisingly powerful force in investment and can generate some astonishingly large losses at times.
Many of the capitulating sellers in this current bear market will be those who were in such a hurry that they borrowed money to invest or simply bought fairly recently and can’t bear the reality of losses that have mounted so quickly as the market tanks.
Long term investors nibble away at stocks
Long term investors would not really belong in this camp and should be able to avoid the temptation to crystallise losses arising from a sharp fall and instead stay the course, relying on their asset allocation to nibble away and buy some more stocks even as the ones they already own fall sharply.
The best returns in investments come from buying low and selling high but it is always the case that many investors do the reverse – buying in at times of great excitements and selling out when the market takes a nasty turn.
Of course, the very best position to be in in to be like Buffett, sitting on a pile of cash and preparing to pick up as many bargains and great deals as possible.
Value investing is often derided when markets are running hot and it is seriously underperforming the flashy trend followers – a situation that we were in just a month ago.
However, at times like this value investing really comes to the fore and can produce some really outsized returns that dwarf some of the short-term speculative gains that characterised the 11-year bull market that just ended.