Warren Buffet has made an investment move that will confound many investors at the moment as markets tank, plunging back into the market as others are leaving it in droves.
But investors should nevertheless understand his massive change of heart about shares and value.
After being a net seller of shares for two years and buying back his own company’s securities because he couldn’t find value – and complaining in his annual investor letter in February of the lack of investment opportunities – Buffett has spent $US51 billion in sharemarket deals in the past 10 weeks that seemingly proves him wrong.
That he spent up big while share prices were falling tells us that the world’s best-known investor spotted value – including in carbon-based oil giants, a move that will upset ESG investors especially.
But in he plunged, in one of his biggest ever buying spree – certainly the largest since 2008. Helped by two key managers, Ted Weschler and Tod Combs, Buffett used a big swag of the December 31 cash pile of $US146 billion very quickly.
After Berkshire also sold $US9.7 billion worth of shares in the quarter, the cash pile had fallen to $US106.4 billion by the end of March.
But it was the investment splurge that stood out – a big takeover, along with new shareholdings and existing positions being topped up – and he cut back on the pace of share buybacks that had dominated his investment moves in 2020 and 2021.
In fact the $US51 billion spent in the quarter in the market equalled the amount spent on buybacks in the past two years. That told us more about his change of heart so far as the stockmarket is concerned.
That is a sharp reversal of his approach in 2021 that saw $US7.4 billion of net sales in stocks and $27.1 billion in buybacks. Berkshire bought back $US3.2 billion of its own shares in the March quarter, a low amount compared to the quarterly rate last year of close to $US7 billion.
Buffett told the meeting Berkshire didn’t buyback any shares in April when the shares fell more than 8%.
In 2020 and 2021 Buffett was criticised repeatedly by so-called expert investors about how he had too much cash on his balance sheet, that it was lazy, that he was an ‘old’ investor and more (forgetting he had built the biggest single position in Apple before it became the world’s most valuable company).
And that Berkshire did this as markets sold off in fear of a more rapid and larger rate rises from the Fed, and higher inflation, tells us that Buffett has again made one of those big changes he has made all through his long career at precisely the same time as many bigger investors (Blackstone, Vanguard, Fidelity and others) were heading for safety and bonds and not the market.
It’s a variation of the old ’straw hats in winter’ adage for investors to buy (or sell) when conventional wisdom says not to.
The investment splurge was one of many questions he and Berkshire vice chair Charlie Munger addressed at the company’s annual meeting in Omaha, Nebraska on Saturday, the first in person meeting since 2019.
Since late February, Buffett and Berkshire Hathaway have agreed to pay $US11.6 billion for insurer Alleghany Corp in his biggest purchase in six years.
Berkshire also bought back into Occidental Petroleum, a company it helped finance a $US37 billion takeover several years ago with a $US10 billion debt deal. Berkshire bought a $US4.2 billion stake in HP, in the tech company (printers, toner etc). Berkshire is now the biggest single shareholder in Occidental and HP, as well as Bank of America, Apple, Coca Cola and Amex
But the most telling move was Berkshire lifting its stake in energy company Chevron, listing its $US25.9 billion stake as one of its top five holdings in a stock portfolio now worth $390 billion. The is a stake of more than 8% in the major (which has significant investments in Australian LNG with Woodside).
Berkshire held $US4.5 billion worth of Chevron shares at the end of December, so the $US21 billion was the largest single buy of the quarter.
The deals and market moves saw Berkshire’s cash stake sink more than $US40 billion to around $US106 billion in the quarter, but Buffett assured shareholders that they should not worry.
“We will always have a lot of cash,” he said. “It’s like oxygen, it’s there all the time but if it disappears for a few minutes, it’s all over,” he told the well-attended annual meeting on Saturday
Buffett explained a couple of the deals, telling shareholders that he became interested in Occidental after reading an analyst report, and in Alleghany after its Chief Executive Joseph Brandon, who once led Berkshire’s General Re business, wrote to him.
“Markets do crazy things, and occasionally Berkshire gets a chance to do something,” he said. “It’s not because we’re smart…. I think we’re sane,” he said in quotes from media reports.
…………
Berkshire Hathaway reported a decline in first-quarter earnings, thanks to a sharp fall in unrealised stockmarket gains (which have to be taken into profit under accounting rules.
The company’s net earnings for the March quarter came in at $US5.46 billion, down more than 53% from $US11.71 billion in the year-earlier period, driven by big falls in the value of the company’s big holdings such as Apple, Amex, IBM, Bank of America.
The S&P 500 fell 4.9% in the three months to March and it got worse in April with the S&P 500 now down more than 13%.
Meanwhile Berkshire Hathaway shares are up more than 7%, outperforming the wider markets over the same period.
Operating profit was flat thanks to a big slide in the performance of the company’s huge insurance business – the largest in the world
Berkshire’s operating earnings — which encompass profits made from the myriad of businesses owned by the conglomerate like insurance, railroads and utilities — were totalled $US7.04 billion.
The sharp drop in the company’s insurance underwriting business saw earnings from the segment drop nearly 94% to $US47 million from $US764 million in the year-earlier period.
Berkshire noted cost increases in some of its businesses when it reported earnings on Saturday for the March quarter.
Geico, the auto insurer, posted an underwriting loss in the first quarter because loss claims rose as used vehicle prices and parts surged higher.
“Inflation swindles the bond investor … it swindles the person who keeps their cash under their mattress, it swindles almost everybody,” Buffett said.
Buffett also picked on a favoured target, Wall Street, saying the stock market sometimes resembled a casino or gambling partner.
“That existed to an extraordinary degree in the last couple of years, encouraged by Wall Street,” he said.
Warren Buffett said on Saturday that inflation “swindles almost everybody” and that it was “extraordinary” how much inflation had been seen in Berkshire Hathaway Inc’s own businesses.
Buffett said he did not know what level inflation would be in the next month or decade, but that rising prices were having an impact.
“Inflation in our own business, it’s extraordinary how much we’ve seen,” Buffett said. “For two years the prices have kept coming in higher.”
…………
The annual meeting later voted on a number of proposals, rejecting them all, including one to make Berkshire separate the roles of chairman and CEO that Buffett currently combines.
That proposal came from the non-profit National Legal and Policy Center. Shareholders voted down the proposal which backed by CALPERS, big Californian public pension fund (and the biggest in the US).
