It usually drives me crazy when people get super dismissive of Warren Buffett. I'm not saying the man's a saint or has a perfect track record or anything of the sort (I've read "The Snowball," among much else of the Buffett literature). But he's been damn good at investing, and critics who don't even know much about his approach always want to just roll their eyes or explain away his achievements.
By approach, I mean Berkshire's unique focus on buying companies and reallocating the capital they generate into higher-returning investments (which often means buying more "great companies at good prices"). It's why, for instance, buying See's Candies was one of the most important moves Berkshire ever made. But Berkshire has been struggling to find targets as it's grown; the last "elephant" they bought was railway Burlington Northern way back in 2009. And now, some of Berkshire's investments in publicly traded stocks (memorably, the IBM fiasco) have been struggling, too.
I was very surprised to learn this weekend that Berkshire has sold out of its airline holdings. Especially because it sounds like (a) the decision was either made or endorsed by Warren personally, and (b) the decision was made after coronavirus hit the U.S. (and they've only owned the stocks since 2016 at the earliest). It's unlike Warren Buffett to sell a sector or a company that's out of favor; typically, that's when he's a buyer. That's why he made such a splash back in October 2008 with his New York Times op-ed: "Buy American. I am."
But in this case, even while repeatedly assuring listeners this weekend (full recap here) that America's future is as bright as ever, and that Covid-19 didn't even derail the country so much as temporarily sideline it, he sold all of his airline holdings, most likely as they were collapsing in price. "It turned out I was wrong about that business," Buffett said. "I don't know that three, four years from now people will fly as many passenger miles as they did last year."
Again, odd. Three or four years is typically the blink of an eye for Berkshire; they have practically permanent capital that can outlast the patience of almost any other investor in the market. But perhaps Warren thinks this is a permanent business shift and airline profits will be hit for a generation or more. Over to value investor and Buffett watcher Bill Smead for more:
"We were baffled," by Buffett's remarks over the weekend, Smead wrote yesterday. For one, instead of scooping up Berkshire's own shares during this selloff, as Buffett has repeatedly said he would do over the years, Buffett remarked only that he was not a heavy buyer of Berkshire common shares ("The price has not been at a level where it really feels way better to us than other things, including the option value of money, to step up in a big way," Buffett said.)
Secondly, Buffett reiterated his view that most people should simply own a broad S&P index fund at a time that, according to Smead, large growth stocks are overweighted and "this current environment is perfect for Ben Graham-style value investing, like what Buffett did from 1955" until roughly the late 1980s.
Thirdly, "When Warren called himself a 'trustee' of Berkshire Hathaway on Saturday evening," said Smead, "it sent chills down our spine. We don't own BRK.A not to lose money on it...we own them to create wealth over long periods of time."
Fourthly, Buffett was not only a not a heavy buyer of Berkshire; he wasn't, according to Smead, a net buyer of of common stocks overall during the market's recent plunge, even as he reiterated that that's what everyone should be doing for the long run.
All in all, Smead is left wondering if the money his funds have in Berkshire might be better off redeployed elsewhere now, "with more risk, but much higher possible long-term rewards. A younger Warren Buffett with a capital base our size might wholeheartedly agree," he wrote.
"His editorial to The New York Times today would say, 'Never Bet Against America, But Don't Bet on American (Airlines)!" said Smead. Or, as Jamie Cox of Harris Financial Group put it: "Don't Buy American (Airlines). I'm Not."
(Everyone's focusing on American because of the play off Buffett's '08 headline, but it also has the weakest balance sheet of the sector. Better to mentally substitute "Delta" or, especially "Southwest"--both of which Berkshire owned shares in--instead.)
Now, if Berkshire turns around and makes a huge splashy buy, not only will it justify their conserving cash instead of doing more share buybacks, it will assuage many of these criticisms and concerns (although not all of them). Increasingly, though--and perhaps inevitably--it feels like the end of an era.
See you at 1 p.m!