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Warren Buffett may be slower to make a big purchase than some expect. He explains why. (AP … [+]
A frequently asked question during any time of market stress is what will Buffett do? He has a reputation as a negotiator, and Berkshire stepping in with a big problem can be a positive sign for those who invest with a similar approach.
Warren Buffett held court at Berkshire Hathaway
Looking for the right deal
Buffett shared that his goal is above all to make the right deals for Berkshire. You cannot control when these opportunities arise. There is no guarantee that such an agreement will coincide with a pause in the markets. If it does and people see it as a sign of confidence in the markets as it did in 2008-9, then Buffett is very happy to provide that boost, but that is never his ultimate goal. He will not make deals to instill market confidence, his goal is to find the right long-term business for Berkshire. Those opportunities are rare, especially at the size Berkshire now operates in, where significant deals generally must be in the tens of billions.
Fed actions
Buffett also shared that during the most recent market panic in the second half of March, he believed that the Federal Reserve under Jay Powell did an excellent job. Credit markets were on track to freeze later in March, in Buffett’s opinion, and the Fed blocked this result with firm actions. Buffett thought the Fed has handled this crisis very well so far, but ironically, that good handling of the financial markets means fewer options for Berkshire to step in. Phones started ringing, though not with great deals, as credit markets headed for trouble in late March, but Federal Reserve actions meant that companies had less need to seek financing in Berkshire, and the debt issuance reached high levels after the actions of the Federal Reserve. Basically, the Federal Reserve provided liquidity so Berkshire didn’t need it.
An abundance of caution
Buffett also shared that he doesn’t see the Berkshire cash pile as just ammunition for deals. It is also an extreme buffer layer for Berkshire insurance operations. While in all virtual states of the world, that buffer is unlikely to be invoked, it is theoretically possible. For example, Buffett mentioned that just because you’ve had a hurricane doesn’t mean you can’t have an earthquake. The negative effects of virus tracking were possible if they were far from safe. In fact, Buffett didn’t even want to describe such events in case talking about them to a wide audience made them more likely. Buffett did not want to make short-term predictions about the virus or the economy. Still, he saw certain scenarios where some cash might be required for Berkshire’s insurance operations. Because of this, cash on the balance sheet may seem idle, but it also plays an important business role. Berkshire’s operating businesses beyond insurance may also need cash.
High uncertainty
On many occasions in his comments and, as in previous years, Buffett refused to make a call to the market. Buffett is bullish on the markets in a decades-long view, and is especially positive in the United States. However, he does not necessarily think that markets will necessarily perform well over the next day, month, or year. That does not mean that it is necessarily pessimistic, rather than the short term it is very difficult to predict and at the moment there is an extremely wide range of potential results in Buffett’s opinion. Rather than recommending selection actions, Buffett’s main advice is that those who don’t panic during market recessions consider owning a low-cost S&P 500 tracking fund and plan to keep them for decades.
Therefore, those looking for Buffett to put cash to work in this crisis may be disappointed. Symbolic agreements are not your goal. His goal is to find the right long-term companies to invest in. The uncertainty associated with this crisis, which theoretically may require cash for insurance operations in the worst case scenario, coupled with the extreme level of support offered by the Federal Reserve may mean that Berkshire is slower to make a big move during this recession. For now, his main moves are to sell his shares in the airline and issue some debts.
