08 May 2022

    Wisdom from Omaha

    Buffett has been busy buying

    Ashley Gardyne

    Chief Investment Officer

    Ashley Gardyne

    Chief Investment Officer

    Investors need no reminding that the start to the year has been volatile. Global share markets fell 8% in April1, bringing the year-to-date decline to 13%. The tech-heavy Nasdaq index has fared even worse – falling 14% for the month and 21% year-to-date. Share market declines have come amid concerns about surging inflation and rising interest rates, both of which threaten to slow the global economy. While this volatility is notable, investors are taking different approaches to navigating it. Some are selling, while others are buying.

    In these turbulent times, investors have been hanging out for some wisdom from Warren Buffett and in recent days all eyes have been on the Berkshire Hathaway annual shareholders’ meeting. The meeting attracts thousands of investors and business executives, all eager to hear Buffett’s assessment of the current investment environment. This year the audience included Apple CEO, Tim Cook; JP Morgan CEO, Jamie Dimon; and Microsoft founder, Bill Gates.

    So, what did attendees learn?

    Buffett has been busy buying

    Back in February Buffett said there is “little that excites us” in the market; meaning he was struggling to find attractive new investments. But as markets have continued to fall, he has clearly changed his mind. Buffett bought over US$40 billion of stocks in the first quarter, making this the billionaire’s biggest stock buying spree for at least a decade. He has been undeterred by geopolitical turmoil and inflation fears. These recent purchases included sizable investments in Chevron, HP, Occidental Petroleum and Activision Blizzard. This buying marks a sharp reversal from 2021, which saw over US$7 billion of net sales in stocks.

    While Buffett’s commentary is always worth considering, actions speak louder than words. With market valuations falling back in line with long term averages, he is clearly finding more attractive opportunities and is putting Berkshire’s money to work.

    Don’t try to time the market, the future is unpredictable

    Buffett reminded investors that trying to time the market is speculation, not investing. Investors should try to identify great businesses, buy them when they are attractively priced, and hold them for the long term.

    “We haven’t the faintest idea what the stock market is gonna do when it opens on Monday” Buffett said in response to a question from the audience. “I don’t think we’ve ever made a decision where either one of us has said we should buy or sell based on what the market is going to do, or for that matter, on what the economy’s going to do. We don’t know” he continued.

    This is wise advice. If you tried to time the market and got out when volatility picked up, you may have sold during the COVID sell-off, or on the Brexit vote, or when Lehman Brothers failed. If you didn’t get back in quickly (few people do), you would have missed out on significant gains.

    So, if Buffett doesn’t try to time the market, why is he buying now? Without predicting what will happen next month of next quarter, he simply sees good value in the businesses he can buy at current prices. Buying at a lower price means better expected returns.

    Avoid crazy parts of the market

    Although Buffett and his partner Charlie Munger are seeing better investment opportunities currently, they also warned investors of excesses and irrational behaviour in parts of the market.

    Buffett likened the market over the last few years to a casino and blamed the financial industry for encouraging risky behaviour among investors. He talked about how mobile apps like Robinhood were encouraging the trading of short-dated options – which are extremely volatile and lucrative for the brokers selling them.

    Another example of these excesses is the bubble that developed in thematic growth stocks, in areas like genomics, battery technology, and software. The abrupt bursting of this bubble has seen the widely followed ARK Innovation ETF, managed by Cathie Wood, fall 70% from its peak last year.  They also took another swipe at cryptocurrencies, which they see as potentially worthless.

    Their advice for investors was to avoid these pockets of irrational exuberance – which can be hard to do when your friends seem to be making quick and easy investment gains.

    With Buffett’s track record, it pays to listen

    Warren Buffett’s career has been a testament to the fact that a disciplined approach to investing can produce significant gains. From the start of 1965 through to the end of 2021, the per-share market value of Berkshire Hathaway delivered a compound annual gain of 20.1%. That is nearly double the S&P 500′s 10.5% over the same period.

    So, what is Buffett doing now? He’s busily scouting for new investments and putting a record amount of money to work as market volatility provides opportunities. Investors are likely to do well following his lead. We believe good investment opportunities are far more abundant now than they were last year and we are positioning our portfolios accordingly.

    1 Measured by the MSCI World Index