As usual there are plenty of lessons to learn from the world’s best investor, Warren Buffett.
Delivering his first ever online investor presentation due to the COVID-19 pandemic, the 89-year-old nicknamed the “oracle of Omaha” once again delivered a lot of investment lessons for those who are willing to learn.
Naturally the thousands of investors who normally flock to Omaha, Nebraska to what is often called Woodstock for capitalists were disappointed that their annual weekend pilgrimage had to be called off due to COVID-19 restrictions.
Still, even in virtual form, delivered plenty of great gems to learn from in his particularly homespun and modest style.
So let’s go through them one by one to see how the world’s best investor is reacting to the extraordinary times we live in that have seen most of the world’s largest economies deliberately pull up the shutters to avoid as much of the pandemic deaths as they could.
Be prepared for losses
Even the best investors need to always be prepared for losses – it goes together with the exceptional returns that you can earn from share markets like a hand and a glove.
In the case of Buffett’s conglomerate Berkshire Hathaway, it lost almost US$50 billion in the first quarter as share markets tanked due to the COVID-19 pandemic.
However, those losses need to be put in context – they reflect share market valuations rather than actual losses.
Even so, it is a big reversal for Berkshire Hathaway but there was no sign of panic or excessive worry in Buffet’s presentation – more of a been there, done that sort of resignation.
Sometimes you need to sell out fast
Sometimes you need to admit you have made a mistake and sell out at a loss.
In Buffett’s case after many years in which he finally seemed to have got over his allergy to investing in airlines, he bought 10% stakes in American Airlines, Delta Air Lines, Southwest Airlines and United Airlines. “It turns out I was wrong,” Buffett said of those acquisitions that cost around US$ 8 billion.
After selling out of these stakes entirely during the crisis, Buffett admitted “we did not take out anything like that.”
Buffett added that because of the pandemic’s impact on travel, “the airline business — and I may be wrong, and I hope I’m wrong — but I think it, it changed in a very major way.”
In the long-term, valuations of solid businesses recover
The lack of panic Buffett exhibited is due to the fact that he always invests in solid, profitable businesses.
In the long term, shares in businesses that remain profitable usually recover.
Despite the US$50 billion loss in the first quarter, Buffett remains confident that the losses are temporary.
“We’ve faced great problems in the past, haven’t faced this exact problem — in fact we haven’t really faced anything that quite resembles this problem. But we have faced tougher problems, and the American miracles, American magic has always prevailed and it will do so again,” he said.
Measured by operating earnings which exclude market valuations, Berkshire actually performed quite well, growing from US$5.55 billion to US$5.9 billion a year earlier.
Playing it safe is a good option
There is no shame in playing it safe when times are tough.
Berkshire continued to sell US$6.5 billion in shares during April – mainly airline shares – and resisted the temptation to buy back into other shares, obviously not believing the time was right. Instead the company bought safe but very low yielding Treasury Bonds with the proceeds, effectively parking the money for the time being.
Companies that supply essentials
Investing in companies that produce something that everybody needs really pays off in tough times.
Many of Berkshire’s companies were deemed essential and kept working during the closedowns including rail transport, energy production and some manufacturing and service businesses.
Understandably, Berkshire was not immune to large reductions in sales and staff cuts to deal with the crisis but Buffett believes such adjustments will only be temporary.
Timing purchases is important
Many people have criticised Buffett for building up a tremendous cash pile but at the moment that cash and the patience it represents is about to be rewarded big time.
Timing is everything and Buffett’s current cash pile of US$137 billion (A$214 billion) will be crucial in grabbing opportunities for an elephant sized acquisition or recapitalising a sound business that needs a hand.
Interestingly, the fact that Buffett has been selling into the recovering market rather than buying sends another interesting message – that he believes there will be better buying opportunities down the track.
That tends to suggest that in Buffett’s mind the impressive share market recovery in April was a time to sell stocks rather than a sign that the worst is behind us.
He obviously believes that the nasty lows we saw back in March might make a reappearance down the track a bit.