Over the course of several decades, Warren Buffett has been taking the investment approach that has made Berkshire Hathaway the sixth largest company in the S&P 500. Warren Buffett is also the fourth richest person in the world. And these are good reasons to pay attention to what he had been saying at the annual meeting of Berkshire Hathaway for five hours.
During the first 60 minutes Buffett discussed the mistakes that America had to fix in the previous 244 years. Then Berkshire Hathaway CEO shared his outstanding views on markets, economics, corporate governance and more. Warren Buffett raised topics that are of interest not only to fund investors, but to investors around the world.
The reason why the US will never default on its debts
“If you print bonds in your own currency, the question is what will happen to the currency,” Buffett said. He emphasized that "the United States was smart to release its debt in its own currency." Other countries do not and therefore they get problems, Buffett noted. As an example, he cited Argentina, which has debts not in the country's currency. “Many competent countries will have similar difficulties in the future.”
The growing public debt of the United States is a concern for many, as tax cuts and rising costs create a constant gap. In his explanation, Buffett outlined the opportunities that distinguish the US Treasury. The government owns a printing house to pay money to the holders of its debts. “If I could issue the “Buffett Bucks” currency, and if I had a printing press and could borrow money, then I would never have defaulted.”
This is the common motive of the modern theory of money, as well as Alan Greenspan’s, an American economist and former chairman of the US Federal Reserve, who once said: “The United States can pay any debt they have, because we can always print money to do this. So, the probability of default is zero.”
Of course, if you simply print money to pay for obligations, inflation will accelerate.
Passive investing is not dead
Despite stock market volatility in recent months caused by the COVID-19 coronavirus pandemic, Warren Buffett continued to defend index funds. These are mutual funds that track market indices, such as Standard & Poor's 500.
“There is something special about index funds.” It is these funds that are a key component of his estate planning. Buffett emphasized this, admitting that his widow would have 90% of the insurance in index funds. "I think this is better advice than what usually comes from people who get paid for advice."
Buffett is against active stock selection strategies and he again recommended that investors place their funds in a passively managed index fund. Among the advantages, Buffett pointed to the low commissions offered by index funds, as well as profitable results. Therefore, investing in indices is a smart way to invest.
It is worth noting that owning a passively managed index fund, for example, focusing on the S&P 500 index, does not imply that it will be a fixed set of shares. “50% of S&P 500 companies can be replaced within the next 10 years,” Bank of America notes. Bank strategists saw the pattern that existing companies are facing a shorter life cycle. These processes are partly driven by a complex combination of technological change and economic shocks. Companies often miss opportunities to adapt or take advantage of change. Therefore, fund managers replace shares of falling companies with growing ones.
If you follow the advice of a famous investor about investing in ETFs, what funds should be considered for purchase?
Buffett usually talks about the ETF at the S&P 500, which represents a good section of American business. Investors may also consider buying an S&P 500 ETF of equal weight. This means that each company is weighed equally and not by market capitalization, where technical titans outweigh. ETF on the NASDAQ 100 - it should be borne in mind that Microsoft, Apple and Amazon are the three largest companies, which make up about 33% of the portfolio. ETF to DJIA Index. So, the SPDR Dow Jones Industrial ETF invests in an index that consists of 30 components. This is a weighted price, meaning that the largest component is Apple: 8.5% of the portfolio, as it trades at the highest price.
Impact of COVID-19 on financial markets
A veteran investor recognizes when it is difficult to quantify risks, it is best to make mistakes, remaining on the conservative side.
He highlighted energy, retail, airlines and non-residential real estate as industries that were destabilized by both the situation with COVID-19 and the ensuing tough quarantine measures. According to Buffett, these sectors are unlikely to demonstrate past successes in terms of growth and profitability.
Making mistakes and bad ideas is part of the process
One of the most cited and controversial points at the annual Berkshire Hathaway meeting was Warren Buffett's announcement that he had abandoned his billions of dollars in four major US airlines: Delta Air Lines, Southwest Airlines, American Airlines Group and United Airlines.
“The world has changed for airlines,” he outlined the potential long-term impact of COVID-19. The future of airlines, according to Buffett, is unclear over the next two to three years.
This news was received ambiguously, as Buffett is known for his principle, saying that his "favorite retention period is forever." Buffett said buying shares in the airline “was my mistake.” The price of the error is about $2 billion: the initial investment in these airlines amounted to about $8 billion, he sold them for about $6.1 billion.
Successful investing is more than just buying winners. It is about selling humbly and disciplined when a mistake is made. “Drop losers” is also part of the investor’s strategy, Buffett teaches.
What Buffett and Berkshire Hathaway do in COVID-19 crisis
What strategy investment Buffet choose in the face of economic uncertainty and the aggravated market situation caused by the COVID-19 pandemic and unprecedented restrictive measures, Charlie Munger, business partner of Warren Buffett and vice chairman of Berkshire Hathaway, said in an interview with the Wall Street Journal.
What Berkshire Hathaway Won't Do
The fund will not buy and hunting for businesses, as it did in 2008, as it is "the worst typhoon that has ever happened." Buffett then invested in blue chip companies, including the Goldman Sachs Group and General Electric Co., and in 2011, Bank of America Corp. In the 2020 situation, "no one knows what will happen."
What Berkshire Hathaway will do
Berkshire Hathaway will continue to stay in liquidity. Munger declares that the company does not play games like "everything goes to hell, let's load 100% of the funds into the purchase of a business."
Assessment of the situation
“I do not think that we will have a long Great Depression. But we may have a different kind of unrest. All this print of money may start to bother us.”
About the aviation industry
“It’s a typical reaction, people are like frozen,” that is, everyone just froze in the position they are in. Munger emphasized the airline industry, arguing that corporate executives are not taking action to strengthen the balance, but only rely on government assistance.
It is the shares of airlines that clearly show how the of Manger’s and Buffett’s thinking and position have changed.
So, on February 27, Berkshire acquired 976000 shares of Delta, $46 per share, to the existing stake, resulting in a total share of almost 72 million shares. March 13, when the shares of the airline industry were rapidly declining, Buffett announced that he would not sell shares of airlines. His words added positive, increasing Delta's stock price to $38 that day. In addition to Delta shares, the fund's portfolio, according to the SEC, contained more than 53 million shares of Southwest, 42 million shares of American Airlines and almost 22 million shares of United Airlines.
However, data for April 3 reflected that Berkshire sold 13 million shares of Delta and 2.3 million shares of Southwest, receiving about $389 million.
Based on the market capitalization of the WOLF STREET Airlines Index, which tracks the seven largest US airlines, shows that the combined airlines are still near the March low. But Berkshire does not see this as a historic buying opportunity.
How long will this recession last?
“No one in America has ever seen anything like it,” said Manger. “Everyone says they know what will happen, but no one knows what will happen.” “Of course, we have a recession,” the investor said. However, no one knows what damage will be done and how long it will last.”
Berkshire Hathaway position
The company will suffer losses, Munger predicts. “This will force us to shut down some of the bad businesses.” If earlier such enterprises were more tolerated, now some small businesses will not be restarted, even when it is all over.
Berkshire Hathaway Strategy
On the one hand, the strategy is safe, that is, basically the company intends to adhere to a conservative approach. On the other hand, Manger does not deny that it is possible "we can do something rather aggressive or take advantage of some opportunity." Thus, a combination of approaches will make the company stronger, says Berkshire Hathaway vice chairman.
What about the stock market?
Here, the position of the great gurus is radically different from 2008. In 2008 and 2009, Buffett was on television and in the press, tried to calm panicky investors, and indicated a unique opportunity to buy shares.
In 2020, Charlie Munger, Warren Buffett's business partner, states: "I have no idea whether the stock market will go below the old lows or not."
Therefore, Manger and Buffett are sitting on a huge pile of cash, which only increased due to the sale of airline shares. Berkshire Hathaway has a market capitalization of approximately $466 billion, including a cash fund of $125 billion.
