What we can learn from the Berkshire Hathaway Annual Meeting
Updated: Jul 3, 2020
This week we had earnings calls from various large cap companies. Tech companies such as Microsoft, Tesla and Netflix showed that the sector still remains strong even during the pandemic that we are all going through. The same cannot be said about some of the other industries. However, the company I wanted to discuss this week is Berkshire Hathaway (BRK.A, BRK.B). Warren Buffett’s conglomerate needs no introduction and many were keenly waiting to see what they announced in their annual meeting.
Nearly $50 billion loss
This quarter Berkshire posted its highest ever quarterly loss at $54.5 billion dollars in its investment portfolio. While much of this loss is unrealized, meaning that it’s a loss on paper until Berkshire actually sells the assets, a large cause of this is due to the investment giant closing its positions on airlines (which will be discussed in further detail in this post). The loss is not really that surprising considering Warren Buffett likes to hold many of the industrials, financial and consumer industry stocks which are all badly hit due to the lockdown around the world. For reference, Berkshire’s largest holding are Well Fargo, Bank of America, Coca Cola, Occidental Petroleum etc, which if any of you are holding would realise have dropped considerably in the calendar year.
What this means to the average investor is that all these industries are going through their cyclical pattern. While these key industries are severely affected by the severe drop in global consumer demand, will eventually bounce back in the long term. If you are investing in these for the long term, then it would be wise to just ignore these stocks for a while until they recover. If you are looking to trade short term, these large companies might not be the best picks.
High cash pile
Berkshire also reported at record $137 billion in cash. This is about $ 10 billion more than they had at the start of the year. So overall, it seems that Buffett has been selling most of his undesired positions and saving up.
Personally what I am inferring from this is that Buffett thinks the market is nowhere close to the bottom and expects it to fall further. As the wily investor he is, I am sure Warren Buffett has a plan up his sleeve and he will go in when the time is right for him. Of course, I do not recommend timing your purchases with Buffett’s for the reasons explained in my previous post Don’t get swayed by billionaires . However, I do think it is worthwhile to wait a bit longer and see how this unfolds.
Buffett has also said “Nothing can basically stop America” and that “the American magic has always prevailed, and it will do so again”. Once again, I interpret this as Buffett telling us that we should keep our hopes high when the fall eventually comes as he expects the US market and economy to bounce back. Personally I have been holding back any additional cash I have and liquidating my positions where they are profitable at the moment to be prepared for any market crash that might come.
Airlines, a big mistake?
This is the most important part of the release to me. Yesterday, Berkshire Hathaway announced that it had sold out of ALL of its airlines positions in the last quarter. This is a pretty extreme move for Berkshire. Warren Buffett admitted that he made an “understandable mistake” when he invested in the airline industry. He also said “I don’t know that 3-4 years from now people will fly as many passenger miles as they did last year”.
There are a few facets of this I want to discuss. Firstly I want to remind everyone that Warren Buffett said in March 2020 that he will not be selling any airline stocks. This was reported on 13th March 2020, and based on his statement there is little ambiguity in what he said. At that point in time he was holding large stakes in Delta, United, Southwest and American airlines. But suddenly, within a month from that statement, he sells his entire airline portfolio. Of course, I don’t blame Buffett for lying as he was merely fulfilling his responsibility to his shareholders. If he had announced he does not like airlines anymore, he would have caused their prices to come crashing down. However, it does beg the question that can we trust a single word any of these billionaire investors say. I mean it cannot get more clear than categorically stating that you will not be selling something. So I will just reiterate my point from my earlier posts, that while we should definitely keep track of these billionaire’s moves, it is actually very unwise to copy them.
Anyways, this news came out during the weekend, after market close. We will see what happens to the airlines when the market opens again on Monday. I expect all the stocks in that industry to take a hard hit as people will be selling in droves after “The Oracle of Omaha” had forsaken them.
So what does it mean for airlines in the long term. Is it really possible that the airline industry won’t recover even in 3-4 years? I am quite sceptical of that statement. We have gone through many pandemics before, and it makes no sense for a pandemic to fundamentally change the airline industry. People will still want to travel and business travel will have to resume. The only scenario I can think of where airlines don’t recover in 3-4 years is if countries realise that globalisation means that they are dependent on other countries to keep their economy going and they take a conscious step at de-globalising the world. To me that’s quite a stretch of imagination. So even though I do not own any airline stock, I would still think they will recover in the long term as air travel returns to normal. Anyways, you never know, Berkshire could just be calling a bluff and buying back into airlines when their prices fall even more.
So overall, I think it was quite an eventful weekend as Berkshire made many controversial announcements. It should be interesting to see how the market reacts to this news.
Disclaimer: This post should not be interpreted as investment advice as I am not a professional financial consultant. The objective of this blog is to share my experiences with others and receive feedback. I will provide links to my information sources to the best of my abilities, but the reader is responsible for their own due diligence