Buffet’s hoard as a harbinger of a downturn

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01/24/2020

Buffet’s hoard as a harbinger of a downturn

Buffett’s hoard as a harbinger of a downturn, or in a nutshell about the deals done by America's most famous investor during crisis periods

In the world of finance, the name Warren Buffett has long been a synonym for successful, shrewd investment. Just the rumor that his holding company Berkshire Hathaway (NYSE: BRK-B) has set its sights on a company is enough to cause its price quotation to rise sharply. And people in capital markets pay particularly close attention to the structure of his portfolio, which is published by the U.S. Securities and Exchange Commission.

One of the main principles for investing Buffett lives by is to buy companies for reasonable prices. In 2019, the Oracle of Omaha more than once expressed disappointment that the market is too high-priced now, and that he has wanted to make a major acquisition for a long time. The increasing quantity of liquid assets on Berkshire’s accounts attests to what he is saying.

We decided to trace the historical correlation between Berkshire Hathaway’s cash and short-term investments and those for the S&P 500 index. Can Berkshire Hathaway’s growing cash holdings be thought of as portending the stock correction that many people have been talking about in recent times?

From 1999 through Q3 2019, two full-fledged crises have occurred:

  • The 2000-2002 dot-com crash
  • The 2008 world financial crisis

And there were 3 protracted periods of downturn that lasted up to one year:

  • For the first time ever, the credit rating given to the USA by the S&P Global slipped from ААА до АА+ in the summer of 2011
  • The 2015-2016 mini-recession triggered by a slowdown in the Chinese economy, a drop in oil prices, and the Greek government debt
  • The trade war between China and the United States at the end of 2018.

As the graph shows, the holdings on Berkshire’s accounts follow the S&P 500 index fairly closely: they drop during crisis periods, channeled to acquire companies that have fallen in value (this is especially visible from 2008-2009), and they accumulate during periods of booming growth. At present, Berkshire Hathaway holds more than 120 billion USD in cash and cash equivalents on its accounts, which is a record in absolute terms for the company’s entire history.

So, what kind of acquisitions has the legendary American investor made during periods of downturn?

Starting in 2009 (after prices fell to 1997 levels) and right up to 2015, he kept actively buying up Wells Fargo (NYSE: WFC), one of the largest American banks. The quarterly purchases amounted to 2-4% of the existing position, and during the drawdowns in Q3 2010 and Q3 2011 they ranged from 5-6%. Over 6 years, the number of shares grew by almost 60%. Despite the scandals that occurred when customers were provided services without prior knowledge, Wells Fargo still takes up a large share of Buffett’s portfolio.

The holding company opened a position in Walmart (NYSE: WMT) in 2005, and substantially increased its share in Q3 2009 (by 90% all at once). Walmart, one of the largest wholesale and retail chain stores in the world, represents a protective buffer. That is why its shares not only did not drop during the crisis, but showed growth. Every year, Berkshire took advantage of the profit-taking points after the New Year holidays during Q1 to make additional purchases, and closed out its position for good in 2018 at a price that was almost twice as high as the 2009 indicators.

Buffett entered the Exxon Mobil Corporation (NYSE: XOM) in 2009 when the price for oil was about 70 USD per barrel, and, by his standards, left fairly early – in just two years, when oil grew to 105 USD. Currently, there are 3 companies in Berkshire’s portfolio that represent the energy sector, but their proportion comprises less than 1%.

After the S&P 500 index fell by 2015% in Q3 2011, several new names appeared in Berkshire’s portfolio at the same time: Visa (NYSE: V), General Dynamics (NYSE: GD), Intel Corporation (NASDAQ: INTC), and CVS Health Corporation (NYSE: CVS). Shares in IBM (NYSE: IBM) and Dollar General (NYSE: DG) were more than doubled. The only position that is still open to this day is in Visa.

The second half of 2015 and the beginning of 2016 were marked by two major acquisitions: first, Berkshire was given 26.7% in the consolidated food producer Kraft Heinz (NASDAQ: KHC). The deal can hardly be called successful, because since then the shares have lost more than 50% of their value, and about two-thirds of their peak value. Buffett himself admitted that he paid too much for the food giant.

Things were better with Apple (NASDAQ: AAPL). Berkshire bought shares in it for the first time in Q1 2016, and systematically grew its share up to 2019. One of the largest manufacturers of computer equipment in the world now takes up the largest share in the holding company’s portfolio (31.2%), and the share price has shot up by more than two times.

An updated version of Warren Buffett’s portfolio with current price quotations can be found here.

As a conclusion, we can say the following: the growing reserves of liquid assets for Berkshire Hathaway do not, in themselves, indicate an impending downturn on capital markets, but could serve as a rationale for a more cautious investment strategy. In the final analysis, there is good reason why the most famous American investor won fame as an oracle.

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