Warren Buffett, also known as the Oracle of Omaha, conducted Berkshire Hathaway’s 2020 annual meeting this Saturday (May 2. 2020). He discussed Berkshire Hathaway’s first-quarter results and the abysmal loss of $49.7 billion, but the most important thing is the thoughts he shared about the stock market and the future. Let’s see together what invaluable outlooks Warren Buffett shares with us.
You can also watch my video “Warren Buffett’s Annual Meeting 2020 – What Berkshire’s investments tell us about the stock market!” on my YouTube’s channel. Check it out!
Two investments news
The March’s stock market meltdown hammered Berkshire Hathaway’s stock value. The company lost $49.7 billion in the first quarter. Warren Buffett recognized that he made a mistake with his investment in Occidental Petroleum. By the way, you can check out my post on how oil prices affect the stock market.
One of the most surprising news is that Berkshire Hathaway sold out all its airline holdings. You heard me correctly! The totality of its airlines’ stocks, American Airlines, Delta Air Lines, Southwest, and United Airlines, was sold out! It gives us an insight into Berkshire Hathaway’s outlooks concerning the sector.
Value vs. growth investing
You need to remember that Warren Buffett is chiefly a value investor. We can classify investors in two broad categories: value investors, which tend to buy value stocks, and growth investors who prefer growth stocks.
A growth stock is a stock that is expected to outperform the market, not because of its current earnings, but because of its future potential. Amazon is an example of a growth stock. For years it posted negative earnings, though investors were buying it because it was likely the company will make a lot of money one day. Overall we can say that growth stocks tend to be riskier, prone to substantial price swings. If the envisioned projections of sales or earnings fail to materialize, the price could plunge.
On the contrary, a value stock is worthwhile buying not due to its growth prospects, but because the market undervalues it and it trades below its fundamental worth. In the end, it should deliver a superior return when markets realize the real value of the business. So value stocks tend to be less risky, especially since their price-earnings ratio is low. The idea is to buy cheap a “diamond in the rough.”
Airline industry outlook
As I said earlier, Warren Buffett is a value investor. Contrary to you and me, he has a tremendous amount of information about the economy and how it will evolve since Berkshire Hathaway has holdings across numerous sectors. We can read the Wall Street Journal or the Financial Times every day; Warren Buffett will still be ahead with the knowledge he has about the current state and the prospects of the economy. Hence, it is interesting to hear him, even if you are a growth investor.
What Warren Buffett is telling us is that he sees no perspective for the airline industry in the near-, and medium-term. “I don’t know that three, four years from now, people will fly as many passenger miles as they did last year,” Buffett warned. By selling all its airline stocks, Berkshire Hathaway indicates that the airline industry is too expensive now, and future price drops are to be expected. He highlighted the fact that airlines would have too many aircraft. And unused aircraft cost money.
Buffet: pessimistic or optimistic?
Another aspect of Berkshire Hathaway’s annual meeting is the increase of its cash stockpile. Berkshire’s cash, cash equivalent, and treasury holdings ballooned to $137 billion. They never had so much money not invested in businesses or stock holdings. It means that despite the March’s market crash, Warren Buffett does not see any opportunity to buy at a discounted price a great company, well managed and with good earnings, or an undervalued stock. Not right now. And it is a broad view of the economy. “We haven’t seen anything attractive,” he said.
Is Warren Buffett pessimistic? No, he has always been cautious. And Buffett does not mind missing an opportunity if he senses there is too much risk. In one way, we can say that he offered some optimistic comments: “The American miracle, the American magic has always prevailed, and it will do so again,” he said. And also, “You can bet on America…”
However, he tones it down by adding, “…but you have to be careful about how you bet. Markets can do anything.” And we see his prudence lately; he only bought for $1.8 billion of stocks during the dip. He barely scratched his humongous cash stockpile. Another information about the stock market leaked by his actions is that he is not confident in a quick rebound of the economy, and Berkshire’s stock has lackluster perspectives in the short-term.
Buffet’s views on current stock prices
If he believed that the stock market bouncing back will not be followed by another dip, the economy miraculously recovering, he would use his cash to buy back Berkshire’s stock, which has underperformed the stock market for the last past year. Remember, buying cheap is his vision. And it is not that he is against stock buy-backs. On the contrary, he did not exclude to buy back Berkshire’s stock in the future. But not now.
Despite his optimistic comments on the “American miracle”, his actions tell us the story of a slow recovery from the coronavirus, taking years. Not pessimistic nor optimistic, I think Warren Buffett is realistic about the future. The road ahead of us will be hard. And you need to be cautious with your investments. Berkshire’s investments, or its lack thereof, indicate that the stock market is still expensive. So are the current stock prices a buying opportunity? Probably not.
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Question of the day:
Do you think that Warren Buffett, the “Oracle of Omaha”, is right about the perspectives of a slow recovery and that the stock market is expensive right now? Let me know your thoughts in the comments!