Parsing An Oracle

When I discuss “faith-based” companies, I often forget about Berkshire Hathaway (BRK-B). I sometimes express skepticism about some of the companies that bear that moniker, because while they promise world-changing technologies, they often fail to deliver conventional profitability. Faith-based companies typically have a charismatic leader who have convinced a significant cadre of investors that their prowess will eventually reward the faithful with all they have been promised. Berkshire differs from those companies because its charismatic leader has delivered consistent profitability and growth for decades, and its intellectual advantage resides largely within the disciplined mindset of its leader Warren Buffett.

I have never attended one of the annual Berkshire shareholder meetings in Omaha, but it is my understanding that it can be a convention celebrating all things Buffett. I was lucky enough to attend a Wal-Mart (WMT) shareholders meeting in Arkansas in the 1980s that was hosted by Sam Walton, and I have to believe that there are many similarities. Mr. Walton presented a folksy image despite his overwhelming wealth and success, and much of the event included testimonials from truck drivers, greeters, and the like who boasted of their good financial fortune to have been granted WMT shares during the company’s early days. It was a celebration of homespun American values under the aegis of a self-made icon. (My single biggest financial regret is not putting every cent I had at that time into WMT and never selling a share)

Social distancing clearly changed the nature of this year’s BRK.B confab, but Mr. Buffett’s comments were once again scrutinized by investors looking for a clue into the “Oracle of Omaha’s” insights. This year’s comments gave many a puzzling view. Buffett is famous for making well-timed investments during troubled times and rarely selling shares, but we learned that BRK.B was a net seller of shares throughout the most recent crisis. It seemed quite unusual that we didn’t learn of new, opportunistic investments during a chaotic time.

Previous crises were punctuated by high profile investments from Berkshire, most of which proved to be extraordinarily well-timed. That leaves investors to wonder why we saw none this time the markets plunged. Was the downdraft so swift that even Buffett didn’t have time to react? Has age affected his ability to react quickly? Were Congress and the Federal Reserve so quick to move that troubled companies were able to avoid the need for Buffett to arrive as a savior? Is the investment climate so murky that even a sage investor is having difficulty with his long-term outlook? Are valuations in high-quality companies so unfavorable that a famously disciplined investor with a multi-billion dollar cash stockpile is having trouble finding suitable investments? Or is it some combination of these factors?

My guess is that a combination of factors contributed to the net selling at Berkshire. Markets did indeed move very quickly in March and April, and there has been a distinct separation into castes of winner and loser stocks. Unfortunately, BRK.B was heavily invested in airline stocks, which proved to be among those losers. The classic Buffett investments occurred when there were opportunities to buy high-quality companies at distressed prices – like large financial institutions during the financial crisis of 2008-9. The opportunity was much more fleeting this year, and a governmental backstop reduced the need for companies with solid prospects to seek external aid. It is quite possible that the quick governmental intervention robbed BRK.B of some investment opportunities.

Mr. Buffett painted a positive long-term picture for the US economy, saying things like “I will bet on America for the rest of my life”. But I prefer to watch what investors actually do, rather than what they say. I am surely not alone in wondering when and how that next bet will be placed.