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The Oracle has spoken

What we can learn from Warren Buffett’s reading of the Covid-19 crisis.
Warren Buffet. Image: Scott Olson/Getty Images

Billionaire investor Warren Buffett is a notoriously frugal man, both in his lifestyle (he drives his own car, lives in a modest house he bought in the 1950s and eschews all designer frills), and in his words.

Although given the moniker of “Oracle of Omaha” moniker due to his crystal ball-like investment insights, Buffet doesn’t court media attention and seems to be driven by motives other than self-enrichment – he’s a serial philanthropist who has pledged to give away 99% of his fortune in his lifetime and has already donated a good chunk (around $40-billion) to charities.

For these reasons, when Buffett speaks, investors across the globe listen.

It’s unsurprising, then, that we at Sygnia have been keenly waiting for word from Warren on the Covid-19 crisis, especially since Sygnia last year launched its Berkshire Hathaway Fund (SLBRK) – a linked Life Endowment Policy that enables South Africans to cost effectively invest in BRK shares.

The Oracle finally spoke on 2 May 2020, at Berkshire Hathaway’s first-ever virtual AGM, and as usual his predictions are worth pondering. In true Buffett style, the 89-year-old provided sobering reality and unemotional insight into what lies ahead. His predictions can be broadly summarised into three key points:

  • Stock markets have not reached the bottom of the current dip; there is still worse to come.
  • The possible outcomes of the Corona pandemic are “extraordinarily wide” and investors should aim to be “prepared for anything”.
  • Be cool, don’t panic, the market will turn again.

None of these are particularly revolutionary points and, at first glance, are underwhelming advice from the Oracle. But, as a long-time observer or Buffett, I believe it pays to look at what he says in context of what he’s done in the past, and what he’s doing now…

What Warren’s done

Buffett’s overriding investment strategy for several decades is to be an allocator of capital; harvesting capital from all his businesses and deploying it where he can get the best return. Quite simply, he sees potential when prices are favourable, invests heavily and sells at the top end of that cycle. It’s the same tactic he used in the 1960s to turn a struggling textile manufacturing company into the empire BRK is today, holding a market capitalisation of around $430 billion.

This is what Warren does, and it’s resulted in BRK’s consistent performance, which historically has been outstanding. At 2020’s AGM, Buffett summarised returns since 1965 at a whopping 20.3 % for BRK – double the S&P500s’ 10%.

Buffett tends to deal with economic crises in much the same way. During the 2008 economic collapse, he very matter-of-factly stated that the economy had “fallen off a cliff”, and correctly predicted that it would take a few years to normalise. Never one to waste a good crisis, Buffett made numerous opportunistic investments early in the 2008-2009 crisis, including large investments in Goldman Sachs and General Electric, and smaller investments in Harley-Davidson, Tiffany & Co. and the USG Corporation.

Here’s the important bit: Buffett does not swoop in like a vulture to pick off the bones of dying companies. Rather, he waits for companies with the foresight to know to approach him for capital investment before it comes to dying days.

It’s this cash-rich position that gives him the upper edge: he doesn’t join the feeding frenzy and try to “buy cheap”; he typically looks for long-term value investments and portfolio diversity – a strategy that has paid off on the whole, with the inevitable failures making only small dents to BRK’s performance in the long game.

What Warren’s doing

Pay careful attention and you’ll see that Buffett’s underlying strategy is the same for this crisis. In a recent CNBC interview, he said: “When such a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big – very big. Unlike many other insurers, however, handling the loss will not come close to straining our resources, and we will be eager to add to our business the next day.”

In an even more crucial insight into his viewpoint on riding out the Covid-19 crisis, he said: “There’s always trouble coming. The real question is where are those businesses going to be in five or 10 years.”

He reiterated this at BRK’s 2020 AGM, stressing that investors should focus on long-term investing, and predicted that positive returns would be visible from equity markets.

Look closer yet and you’ll see that BRK is currently sitting on almost $130 billion in cash – Warren’s well capitalised and waiting for opportunity to come knocking at his door. That opportunity may take a bit longer than in 2008, as companies first negotiate with governments for bailouts, but my prediction is that Buffett’s phone will soon start ringing as those companies begin seeking capital.

No index fund u-turn

Buffett has long been an outspoken critic of the high fees charged by active fund managers, which ultimately erode investors’ earnings. He’s a vocal supporter of index-tracking funds for ordinary investors, going so far as to bet in 2007 that the S&P 500 index would outperform hedge funds over a 10-year period. He won the bet in 2017 and donated his $1million winnings to charity.

In early May, active fund lobbyists pounced on Buffett’s decision to sell all stakes in four major US airlines (United, American, Delta and Southwest), citing it as a come-uppance for index investing.

But this hardly indicates a U-turn on his support for index-tracking funds. Rather, it’s a continuation of his steadfast investment ethos: Buffett invests with the intention to hold, but he does not cling on when the outlook changes and the business is unlikely to continue being an asset to the portfolio.

During the AGM he explained this quite clearly, saying that although he did not blame any of the airlines’ CEOs for the failure of returns, it was clear “the world has changed” and there is no certainty that the aviation industry will ever recover to pre-Corona levels, and certainly not within the next two to three years.

If anything, Buffett reaffirmed his stance on index-tracking funds for ordinary investors at 2020’s AGM, highlighting the excessive costs of active equity managers, saying that only the minority add alpha to investors: “In my view, for most people, the best thing to do is owning the S&P 500 index fund. There are huge amounts of money people pay for advice they really don’t need.”

The bottom line

This is all very reassuring on a theoretical level, but investors are interested in the bottom line.

Berkshire Hathaway Inc. experienced the same downside pressure and volatility over the past quarter with Covid-19 fears shocking the markets. In dollar terms, BRK returned -20.0% for the quarter.

However, that’s only face value. When we look only at revenue and operating earnings – ignoring unrealised gains and losses – BRK reported a revenue increase of 1.0%, to $61.3 billion, and operating earnings of $5.9 billion, an increase of 5.8%.

On the home front, our SLBRK delivered 2.2% for the quarter in rand terms, slightly below its benchmark – the S&P 500 Net Total Return Index. The fund benefitted from the 27.7% weakening experienced in the rand over the last quarter.

With the market experiencing one of its largest sell-offs in history during March, the expectation is that Buffett and his investment team, armed with their multi-billion dollar war chest, will have been on the lookout for oversold parts in the market.

Meanwhile, the SLBRK remains true to its investment objective of delivering returns, which mirror those of the Berkshire Hathaway Inc.

In other words, sit tight: the Oracle has spoken and, if history has taught us anything, it’s that he is biding his time to act. When he does, steadfast investors should benefit.

Wessel Brand, portfolio manager at Sygnia Asset Management. 

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COMMENTS   8

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Wessel, I am curious, what exactly does a Portfolio Manager do at Sygnia?
If you merely follow Index Tracker Funds, then what is the value-add of your company?
There is no skill – and hence no reward in justifying your small fees – if you merely follow an Index?
Why should investors even pay you any fees? Is it just for your bottom line profit, after deducting overheads? ?
I clearly cannot see any value in using your company or 10X? How do you incentivise your staff to outperform your competition? If the Index drops, you still take the same fixed percentage fee?

They earn fees, whether they make or lose money.

So March Hare what do you suggest ?Go active and pay 2/3 % and they still can”t beat Alpha .I am happy to play “follow the trackers ‘and make my 20 %/30% per annum .Have a look at the passive returns over 1/5/10 yrs of the S & P 500 .What does he do for his fee ? I could’nt give a hoot with my returns,in fact if he contacts me I’ll sponsor him to Seattle Coffee for a month .

Interesting that Buffett has sold most of the holdings in Goldman Sachs and a bit in JP Morgan…not happy to invest in the middleman he is going straight to source with additional holdings in Bank of America thereby supporting the Dollar to protect BPHW wider investment and assist with recovery of the larger economy ( or the perception of recovery!)
As for his lack of faith in the Aviation Industry – this plays off well for his interest in Rail where he has not disinvested!
Interesting to watch how his canny mind works along the simplest equations. What a guy!

Rob, I am not suggesting you do anything? You will decide what to do and the world will continue…..
…just ask these so-called LOCAL passive investment houses to give you comparative performance figures over 5, 10, 15 and 20 years and you make your own decision?
The marketing message from these local ‘passive’ investment houses is as old as the legacy RA products they rightfully nailed? The world has moved on from those days.
I’m not sure about you, but I live in SA and spend in Rands, so I dont use the S & P 500 for my returns comparison? The SA Investment market is soooo different to the US? Get comparative performance figures FOR LOCAL Investment houses- who also invest overseas – and then make your decision?

My sentiments exactly. This is the same point I raised on previous articles where investment companies set themselves targets that they can easily beat to take their performance bonus. For example some multi-asset funds do not even aim to match or beat the median of their sector, instead aiming to beat inflation. Income funds can beat inflation with a much lower risk profile. People need to stop staring at the company name at the top of the MDD and actually read it.

@march look at their share price. They don’t deserve and most know that.

And weirdly the S&P could go back over 3000 today or this week. It is as if a bunch of people ignore the realities:

There is no more quantitive easing to support – what, minus 2% interest?
⅔ of the planes are in storage, ¾ of hotels are shuttered, tens of thousands of restaurants closed probably for good.
US jobless is at 36,000,000 – the graphs did not go that high two months ago.

The S&P will after June quarterly reports be sitting at probably 33 Schiller and total market cap to GDP will probably reach 150% That is more expensive that March 2000 and we are 11 years into a record bull run.

Much better to sit this out in cash. The probability of 33% decline must be multiples of the probability of the S&P at 4000 and an implied 45 Schiller and 200% of GDP

End of comments.

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