Its been almost 3 weeks since the 4 hr marathon talk by Warren Buffett at the annual Berkshire meeting. The entire investing world was anxious to find out  what Buffett had to say, especially, since the start of the pandemic Buffett had not made any public statement. With a cash hoard of upwards of $130 Billion, there was lots of speculation on a big Buffett move in the ensued market carnage, which as we all know by now was not the case.

Below are some key take aways for Mr AVI from the meeting

• American dream is well and alive. Buffett highlights this fact by noting that if one could pick one time to be born and one place to be born, it’d be America of today!
• Household wealth in America today, ~100 Trillion, represents a 5000 to 1 growth in 231 years (compounded at a rate of ~3.75 % annually OR 3X the rate of annual inflation)
• That said, there was a sombre undertone to the the entire meeting. Perhaps, it was the effect of Buffett speaking to an empty auditorium without his long-time partner, Charlie Munger.
• Unlike 2008, when Buffett penned the oped Buy America I am, this time round he is sitting on a cash hoard of $137 Billion and he feels it is not a huge sum when one considers worst-case possibilities! Also, Buffett makes the argument that he likes to have a significant cash on hand for situations when there is a different Fed chairman who may not act with conviction as Jeremy Powell has done with his policy actions.
• Again, unlike 2008, when Buffet was the lender of last resort, there were no deals to be had for Buffett this time round! One reason being, the speed of Fed action.
• Buffett’s acknowledgement that with Covid-19, the circumstances for airlines business has dramatically changed and that he made a mistake in his analysis of $1 Billion earnings, which under current circumstances may not be possible. As such he sold out of all of Bershire stake in four major-American airlines!
• Despite taking a beating, Buffett’s acknowledgement that Berkshire stocks may have been cheaper before Covid-19
• On betting on Berkshire stocks vs. S&P 500, Buffett notes that there is a reasonable chance that Berkshire will beat S&P 500 over the next 10 years.
• On post Buffett breakup of Berkshire, there will be a huge corporate tax liability before anything is distributed to shareholders. Also there are tremendous advantages in capital deployment within the single Berkshire entity.
• On repurchase of Berkshire stocks, Berkshire stocks relative to present value are not at a significantly different discount than they were when Berkshire bought back at higher prices. Option value of money seems more attractive.
• Buffett book recommendations, The Great Crash, by John Kenneth Galbraith and Keeping at it by Paul Volcker.

The biggest news (and possibly most surprising for close followers of Buffett) out of all this was that Buffett did not deploy the abundance of cash hoard to take advantage of the market turmoil.

Some have argued it’s an end of Buffett era! However, if one digs a bit further, it becomes evident that this is not the first time that Buffett eschewed on a seemingly a huge market opportunity. Buffett did something similar in 1987. As stocks began to slide beginning in the first half of 1987, and the drop accelerated with a massive single day drop of more than 20 % on Oct 19th 1987, Buffett remained on the sidelines. Back then he wrote the following in his annual shareholder letter:

During the break in October, a few stocks fell to prices that interested us, but we were unable to make meaningful purchases before they rebounded.

Much as 1987, it seems this time round as well, the markets did not go low enough for long enough for Buffett to efficiently deploy his massive pile of cash to make big stock purchases.

Plan of Action

How did Buffett monologue affect Mr AVI investment decisions?

Not much. Mr AVI has a reasonable sized airlines stock exposure (cost basis ~7 % of portfolio, which unfortunately has now shrunk by 50 %).  Mr AVI anticipates it will take several years for paper losses to recover. Airline stocks with some other sectors such as banking, cruise and travel have taken a massive beating in this pandemic. The gloom-doom news seems to be more than priced in at this point and the only way forward it seems to Mr AVI is upwards! Also,  given AVI family focus on maintaining a healthy balance of emergency funds, he does not foresee any need for him to avail the funds in his household investment portfolio.

On the contrary, Mr AVI is increasing his stake in BRK.B.  While Buffett did not make a significant stock-buy back in the pandemic induced stock drawdown, he noted his optimism for Berkshire stocks to beat S&P500 in the ensuing 10 years. Moreover, Warren has repeatedly stated that he will be an enthusiastic buyer of Berkshire stocks at price 1.2 times book value. Berkshire is currently trading at 1.1 time book.

Assuming, sooner or later we will get through the pandemic, the implicit Buffett put would mean that the bargain on Berkshire will not last long. On the downside, should second wave of pandemic return, the fortress of cash that Berkshire holds, implies a significantly limited downside on the stock.

Mr AVI cost basis on BRK.B currently stands as 8 % of AVI investment portfolio.  Should the stock remain depressed, Mr AVI foresee’s increasing his cost basis holdings to 15 % of the portfolio.

Video/Book/Article/Audio for the Week

• Article: Interesting NYTimes article titled Are You Rich? There is an embedded calculator within the post to determine where one stands on the wealth spectrum relative to the population cohort of given age range. They have an interesting questionaire, “In your view being Wealthy means having net worth in the” — quartile of the population? Implicit in this question is the philosophical notion of wealth is relative concept and a single number may be entirely different thing for different individuals!
• Article: Bill Gates latest book recommendations!
• Article: Tobias Carlisle penned an interesting article titled, Is Value a Value Trap?, noting in the conclusion that in the present situation the value spread is unusually wide, and stocks in the value portfolio are unusually cheap, indicative of possible a strong value bull run going forward!
• Article:  How much could you lose? Nick Magguilli offers a historic data-driven answer to likelihood of various drawdowns in the markets.