It’s the end of the Warren Buffett era?
The last time Warren Buffett got this much negative press was back in 1999 during the tech bubble. At that time, value investing was also labeled dead and markets had become disconnected from reality. The Fed was pumping in trillions of dollars into the economy in fear that Y2K would cause an economic disruption. This week what caught my eye was the front page of MarketWatch.com. It is now the most popular story titled, Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era.
These stories always start out very complimentary about how Warren used to be great. Then they compare the performance of Berkshire to the S&P 500 and show the underperformance. There are 10 investment lessons and stories that I’d like to share in regards to this story.
Lesson #1 – Negative headlines actually create the best investment opportunities. Stocks don’t fall when everything is going well and XYZ stock has to fall for one reason or another which is what creates the value. Rosy headlines do not create opportunities.
Lesson #2 – To the columnist who wrote this story, I’d counter that Warren Buffett doesn’t need a bailout from the Fed. He didn’t take any of the free PPP money either. The S&P 500 desperately needed a bailout about 2 months ago. In fact, it needed $2 trillion in stimulus and it’s going to need another $3 trillion more to get to other side of this pandemic. Warren has $130b in cash on a $430b market cap. Without this much needed stimulus Berkshire would be crushing the S&P 500. I’d estimate the S&P 500 would be down around 50% or more without this stimulus. Berkshire would be using this cash to scoop up all the bargains. This crisis has been different and is unlike anything we have ever seen. Don’t invest expecting a bailout.
Lesson #3 – When the stock market was at it’s lowest, I’d estimate 80% of my clients were beating the S&P 500 return by well over 10%. None of you needed a bailout either for your portfolios. Now if I was managing against the S&P 500, I could have jumped back in and locked in my outperformance vs. the S&P 500. But none of you would have been very happy if the bailout didn’t come and markets fell 20% more and you lost 30% because I was managing vs. the S&P 500. As Buffett said, you don’t want to rely on the kindness of strangers.
Lesson #4 – Warren Buffett’s companies don’t need this $3 trillion or PPP because he planned properly. Your portfolios are all well diversified and I have mitigated risk in this uncertain environment by owning investments that will perform different in various economic outcomes. I expect that some investments will work well and others will underperform. Even your fixed income allocation is well diversified in long term and short term corporates, mortgages, and treasuries. I’m comfortable with the current risk level of your investments because diversification has never been more important.
Lesson #5 – The risk of the S&P 500 is much higher than people assume. It can fall over 50% in a very short time. Without this bailout, it would have taken a month. We have all come to realize the system is rigged to help the rich. The only way to keep the system going is by helping people keep their jobs and putting money in their pockets. The cover of the Economist was Main Street vs. Wall Street. This columnist also had it wrong and you can’t help one without helping the other. The stimulus money is needed, but a strong case can be made that it could have gotten into the hands of the people and companies that needed it the most.
Lesson #6 – Investing is very humbling. You look brilliant one minute and a fool the next. Warren sold all his airline stocks and took significant losses. This was the second time he bought airlines and lost money. The greatest investor of all time got fooled twice. He also lost a boatload of money on an airline preferred decades ago. This time he owned 10% of almost every major airline company. Nobody understands airlines more than Warren. Berkshire owns NetJets which owns the largest flight of aircraft. Another company that Berkshire owns is FlightSafety International which offers training in full flight simulators. You can know something really well and still get it wrong.
Lesson #7 – Keep your losses small and don’t make any one mistake fatal. If you are investing solely in the S&P 500, you can make a one time fatal error. Warren’s loss in airlines hurt, but he is very much still in the game. It took investors who owned the S&P 500 in 2001 and 2008 about 5 years to get back to even. The S&P 500 is a great investment, but it shouldn’t be your only investment. The S&P 500 beats almost everything over time until it doesn’t. This time around investors got a much needed bailout and investors got a second chance. After you make a fatal investment error, there is no recovery. You only get one shot at it and once your capital is gone, it’s gone. If you lose 50%, it takes a 100% gain to get back to even. Without the Fed and all of our favorite politicians, many investors would need a 100% gain to get back to even.
Lesson #8 – The S&P 500 always finds a way to recover. Don’t bet against America because even at nearly 25% unemployment, people want to own a piece of America. We all know that the economy will eventually rebound once we beat this virus. This time around people have placed their bets in advance expecting a fast recovery. Even if the first round of investors are wrong with their timing, there are millions of other investors ready to buy at a lower price. If markets don’t rebound in the next few months, they will eventually recover. Investors will keep buying the dip until someone is right. In volatile markets, dollar cost averaging is the best investment strategy for long-term investors.
Lesson #9 – These bailouts have created a misallocation of capital. The true prices are not being realized and money is flowing into assets that will be supported. Warren didn’t buy any new investments recently because his portfolio is already heavy into stocks. He owns 5% of Apple and 10% of almost every large bank, but all the negative stories say that he is fearful. Berkshire is also made up of 80 other companies. There is no other company more leveraged to the U.S. economy. Berkshire Hathaway is America. If it’s an end of an era for Berkshire, it’s the end of America. Warren doesn’t need a bailout in the worst economic crisis the modern world has ever faced. It’s also not the end of an era for America, and while times couldn’t be tougher, the U.S. will prevail in the end.
Lesson #10 – Investing is in the eye of the beholder. The columnist that wrote the most popular story on Marketwatch has a much different perspective of investing than me. This is what creates markets. I believe as stocks fall they become less risky, and as they rise they become more risky. Berkshire trading at $167 seems like a better deal than Berkshire trading at $230. $150 would be an even better deal. If the journalist wanted to make money and not make headlines, maybe he should be writing about what is working rather than what isn’t. Maybe he is right and the Buffett era is over, but I’ll gladly take the other side of his bet. 🙂
