Buffett Makes His Case For Waiting

By: Spencer Israel

The three biggest news items to come out of Berkshire Hathaway’s annual meeting were:

    • Berkshire completely exited out of its positions in American Airlines, United Airlines, Delta Airlines, and Southwest Airlines during the first quarter. Collectively, those stocks made up 4.22% of his portfolio as of the end of 2019.
    • Berkshire has a record $137 billion in cash and cash equivalents on hand.
    • Berkshire did not make any major acquisitions in the first quarter and spent just $1.7 billion on stock buybacks.

Among the quotes that got the most attention in media coverage: “Never ever bet against America.”; “The world changed for airlines.”; “We have not done anything, because we don’t see anything that attractive to do.”

Overall, Warren Buffett preached patience. The absence of big purchases in the first quarter, he said, was more a function of lack of opportunity than lack of desire. But though he expressed an unwavering belief in the American economy, his actions (or, more precisely, inactions) are far more telling. 

Berkshire’s decision to sit on its record cash pile and not try to scoop up companies on the cheap is surprising. As Andrew Ross Sorkin pointed out, this is a far cry from his playbook during the Financial Crisis, when he stepped in to lend a hand to General Electric, Bank of America, and Goldman Sachs on his terms. 

This time it seems Buffett is content to sit and wait. That sentiment seems to fly in the face of recent market action. 

The “buy the dip” mentality was out in full force in April. In the wake of the worst month for stocks since The Great Depression, the market snapped back in April, rallying to its best month since 1987.

As recently as last week, stocks like Microsoft, Amazon, and Netflix had all rallied to new all-time highs, and the market was moving with such pace that a full market recovery did not seem too far off in the distance.

In terms of fund flows, investors poured $56 billion of inflows into U.S. equity ETFs last month, and through the first three weeks of April net flows into U.S. equity and bond mutual funds were about even for the month, a sharp rebound from the nearly $302 billion in outflows in March. 

All of that that left us wondering what moves Warren would make. How would he confirm our short-term long biases in spite of the economic carnage of COVID-19?

Turns out, he didn’t. His decision to sit on his hands and hunker down in the first quarter speaks to the amount of uncertainty right now. 

For the average buy-and-hold investor, Buffett still maintained his long-held view that owning an S&P 500 index fund is the best long-term investment strategy. But if even the great Oracle of Omaha—the man with the superhuman tolerance for losses—felt the need to admit defeat in his airline investments, maybe that should give the buy-the-dippers a little bit of pause. 

The author is long the stocks mentioned in his retirement accounts.

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