(Photo by A Syed from FreeImages)
Maybe I am getting a bit long in the tooth, but it does seem as if everything is getting faster these days.
Between February 19 and March 23 the S&P 500 fell a shocking 34%. In fact, from the February 19 peak, the Wall Street benchmark took only 16 sessions to enter bear market territory–a record.
But by April 7, and before the newspaper editors had had time to dust down their “funds to buy for an equity downturn” articles, it had risen more than 20%, thereby leaving the bear in the dust. At the close on Thursday, the Nasdaq had even reached positive territory for 2020, putting the top hat on a furious 31% six week (and counting) rally.
I admit I have mixed feelings about this. I went into the downturn fully invested (as always), but comfortable that I owned good quality businesses. My gameplan had long been to take the next bear market as an opportunity to trim some of my more defensive consumer goods companies and add a few more discretionary and economically-sensitive businesses. I did make a few moves (selling some Unilever to buy Facebook and some Hershey to buy Fevertree), but didn’t have time to do everything I would have liked. So is that it? Has the aeroplane taken off train left the station?
Buffett’s not buying
Warren Buffett certainly doesn’t seem to think so.
The Sage of Omaha, despite having spent years waiting patiently for lower stock prices to put his gigantic cash hoard to work, watched this bear come and go entirely from the sidelines. In fact Berkshire’s buybacks were less in Q1 than they had been in Q4 of 2019 and what buybacks there were, were actually made before the big market fall in March. To the end of April, Berkshire has actually been a net seller of equities this year.
We don’t see anything that attractive.
Bufett at the Berkshire AGM
It is an old Wall Street truism to watch what Buffett does, don’t listen to what he says and anyone aware of that will certainly have been struck by the contrast last weekend. While he spent the first hour of the AGM running through a history of the various challenges America has had to face and pointing out how GDP has continued to grow healthily throughout, he did he not add significantly to Berkshire’s equity holdings during the current downturn, despite holding about $135m cash. He must also have seen the lower Berkshire Hathaway share price as a mirage (presumably he expects its operating businesses to earn considerably less than normal returns in future quarters), as he did not buy back more shares. And by historical standards, a book value of 1.1 or 1.2 (which is it currently selling at) for Berkshire is as close to a sure thing as you get.
In recent years, many of Berkshire’s best investments had been those where he provided capital at a high rate of interest, often with a warrant or some sort of equity conversion option bolted on. Bank of America, Goldman, Wrigley, Occidental Petroleum and Tiffany have all signed on Buffett’s dotted line at various times of corporate stress. Unfortunately for Berkshire shareholders this time the Fed seems to have made Buffett’s chequebook redundant:
There was a period right before the Fed acted, we were starting to get calls. They weren’t attractive calls. After the Fed acted, a number of them were able to get money in the public market frankly at terms we wouldn’t have given.
Buffett at the Berkshire AGM
All this is a little bit unsettling on two levels:
- Firstly, Berkshire’s opportunity set seems to be shrinking by the year. Private equity money has long driven up the price of takeovers, low interest rates have hobbled Berkshire’s huge insurance businesses and slashed returns on its cash hoard, and now the Fed has undercut him on lending rates to distressed businesses.
- Secondly, despite the reduced opportunities to invest elsewhere and the 34% market fall, Buffett still doesn’t judge the open market to provide even relatively attractive opportunities for Berkshire’s capital.
Does he think that the chances are high of a second leg down or is he now running Berkshire in safety-first mode with minimum reference to the S&P 500 benchmark, or both? Certainly, it would be very unusual by historical standards if the bear market is over already and we don’t go back down again from here (temporarily at least), but maybe the Fed really has changed the game. Time will tell but there haven’t been too many who have made money by betting against Buffett over the years and so I won’t be rushing to judgement and to paraphrase what Howard Marks said recently, the economy looks a lot more than a few percent screwed up .
In the meantime, Berkshire is still a nice portfolio keystone. It is by far my largest holding and so it is comforting to know it is being run conservatively. That knowledge also gives me the confidence to carry on adding to my other positions throughout this recession and so, even if the rally does continue uninterrupted, at least I won’t haven’t missed the boat.