As most of you might know, Berkshire Hathaway had their annual shareholders’ meeting this past weekend, with the highlight being Warren Buffett speaking and answering questions for more than 3 hours on topics ranging from his views of the post-COVID-19 market, economic trends, and his current investment strategy.
You can watch the full video here, but here’s a summary of key takeaways we learned from Warren Buffett during the session.
#1 Ignore Daily Market Noise To Invest With More Clarity
Warren Buffett said: “Because they are liquid and quoted minute by minute, [people think] it’s important that you develop an opinion on them minute by minute. That is pretty foolish when you think about it.”
Mr Buffett’s advice is that it is foolish to simply let the market’s volatility affect your opinion on certain companies. Just because prices are up one day and down the next does not necessarily change the company’s earnings potential or value at all.
The market can be irrational at times but that does not mean we should be irrational as well.
#2 Having A Perspective Of Stocks Beyond The Numbers
During the session, Warren Buffett remarked that: “Stocks are parts of businesses and not just little things that move around on charts.”
This is something Benjamin Graham taught Warren Buffett back in 1949. One’s investing mindset is very importantas it allows you to look past all the market noise and focus on the company itself as a whole, rather than just a ticker symbol and some numbers moving up and down.
Buffett drew up a comparison between investing in farmland and investing in stocks. Every day the stock market prices companies differently, which may or may not be accurate and in line with the company’s current and future earnings.
Mr Buffett continued: “If you owned businesses you liked prior to the [COVID-19] virus arriving, [even though] it changes prices but nobody’s forcing you to sell and if you really like the business; and you like the management; and the business hasn’t fundamentally changed, then these stocks still have an enormous advantage.”
#3 Invest And Hold Over The Long Term
Warren Buffett said: “I’m not saying this is the right time to buy stocks… I don’t know where they’re going to go in the next day, week or month or year. [But I know that] I can buy a cross-section [of the market] and do fine over 20 or 30 years.”
Here, Buffett is not going to lie to you or pretend he can predict what’s going to happen to the stock market – a day, a week or even a year from now. But he knows that based on economic fundamentals, he is confident enough to tell you that if you bought a diversified representation of the stock market, over 20 or 30 years, you are going to do fine.
#4 Why Buffett Sold All His Airline Stocks And His Views Of COVID-19’s Impact
Warren Buffett cautioned that there could be potential layoffs in the near future if the situation doesn’t improve and demand for manufacturing businesses is significantly reduced.
In particular, he aired his views on the aviation industry, saying: “I may be wrong, and I hope I’m wrong, but I think [the airline industry] changed in a very major way… Four [airline] companies are going to borrow perhaps an average of at least $10 to 12 billion, and each has pay that back from earnings over some period of time.”
Warren Buffett explained that when the company has a substantial debt it needs to repay with its earnings, it takes away the upside of owning the stock significantly.
With the huge impact on the hospitality and tourism sector, Warren Buffett expects passenger miles in the coming years will be much lesser than before. This will have a knock-on effect for businesses in the hospitality and tourism sector.
Even after the pandemic is over and businesses start to resume operations, there is going to be an oversupply of planes and not enough passengers to fill them, since airlines made orders and arrangements for new planes at a time when no one expected an event like COVID-19 to happen.
So, even though Warren Buffett likes the airlines he invested in, given the current state of the industry, he sold all of Berkshire’s stake in those companies.
#5 Explaining Why Berkshire Is Holding On To So Much Cash
Berkshire Hathaway’s current cash position is at a record high of US$137 billion as of 1Q20. Mr Buffett was asked, why is Berkshire Hathaway holding so much cash when the market has already dipped a significant amount?
His reply was that this is partly due to their insurance business. With many customers who are insured under Berkshire, he wants to ensure that they can be well taken care of.
Warren Buffett explained that Berkshire has many people who have staked their well-being on the promises of Berkshire to take care of them. “I would never take real chances with other people’s money under any circumstances.”
He added that Berkshire fully owns several companies and that when you add the value of these to the market capitalisation of equities they currently hold, the US$137 Billion cash position is not as large as it might seem.
Warren Buffett also explained that part of the reason why they have such a huge cash position is because they want to be prepared. The US Federal Reserve did a lot to help out and essentially prevented investment-grade companies from being frozen out of the market. Warren Buffett said that Berkshire is prepared on the basis that maybe the Fed won’t be able to help out the next time something similar happens again.
Using These Perspectives To Form Your Own Investment Outlook
There are plenty of other gems of wisdom that Warren Buffett and his other colleagues bestowed upon the world during the session, so if you have the time, we recommend you watch the entire meeting.
By summarising key insights from the “Oracle of Omaha”, we hope that this will help shed light on the current market situation and give you additional perspectives to form your own investment outlook.
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