Berkshire Hathaway’s 13-F Filing Reveals A $9 Billion Investment And Uncertain Times Ahead
How Warren Buffett is navigating the markets
Up until September, the US markets rallied past ridiculous levels with new investors entering the markets buying call options and going long on stocks that many had little idea about. The NASDAQ had surpassed its previous highs and so did the S&P.
With the ongoing COVID-19 crisis many people would have been skeptical about investing more money into stocks simply because many investors have felt that a major pullback is long overdue.
Some investors had exited the market completely in March, while others have long advocated shifting capital to other safe havens such as gold. But the markets seem to surpass conventional logic, and no one knows when the saying, “this time is different” will come into effect.
Writer, Ben Carlson, summarised this point beautifully:
“This time is always different in terms of the current state of the markets because they’re complex and adaptable. But it’s never different when it comes to our inherent behavioral biases”.
People always search for a reason as to why the stock markets collapse. Some blame the central bankers and their ridiculous policies, while others bash excessive leverage, a drop in exports, and various macroeconomic policies. But these factors have always existed. The market always drops for the same reason:
“The cyclical nature of the markets forces it to behave according to everything else found in nature.
The events leading up to such extreme market swings are always triggered by fear and greed, regardless of the macroeconomic situation at play”.
This time is not different; it will be the same. The quantitative easing policies may keep the markets afloat for a while, but abrupt policy changes can hamper your gains.
Rather than locking in a loss, observing astute investors like Warren Buffett might at least help you allocate your capital more efficiently.
Snippets from the previous quarter
According to their previous 13-F filings, Berkshire Hathaway had sold out 100% of their positions in airlines and certain financial institutions.
The oracle of Omaha has sold out his entire stake in Goldman Sachs while having heavily offloaded stakes in JP Morgan Chase&Co, PNC Financial Services, and Wells Fargo.
He had never been an advocate of buying physical “gold”, but last quarter his firm had acquired a tiny fraction of a gold mining company called “Barrick Gold” to perhaps offset the volatility he might experience from acquiring the “precious metal” alone.
When economic times get tough the notion is that gold prices will either move up or not fluctuate as much.
But if a crash becomes inevitable even safe havens can underperform. The best investors usually prefer to keep anywhere between 5-to-10% of their portfolio in gold to hedge the downside risk of stocks.
Mr. Buffett has a knack for investing in companies that pay a steady stream of dividends, and a perfect candidate in such cases are utility companies and defensive stocks. Mr. Buffett added Liberty SiriusXM Series C, Suncor Energy, Store Capital, and Kroger, some defensive stocks that have fared well in this coronavirus market.
His justification for selling out of all the major airline companies are pretty obvious. The COVID-19 pandemic has triggered a series of events that might force most airlines to either take on a lot of debt or go bankrupt.
While travel will pick up again swiftly once the economy reopens, the series of events that have led most airlines to remain “operational” will not be enough to compensate their shareholders.
He has also sold out of certain fast-food chains like “Restaurant Brands International” (QSR), a major fast-food holding company that hosts the likes of Burger King, Popeye’s, and Tim Hortons.
The fast-food industry doesn’t have a strong economic moat nor a competitive advantage. Sales might be up, but with increased competition margins can come down quickly.
But the major question most people will had was with Mr. Buffett’s decision on selling out banks.
He was buying “gold mines” and selling “banks” something he’s never openly advocated.
The banks were primarily acquired during the 2008 market crash at a significant discount and he, later on, went onto add stakes in the subsequent years.
The ownership percentage wasn’t close to 10% for most banks excluding Bank of America, where he actually added to his position from late July. Berkshire increased its stake in Bank of America by $522 million and set its total position in the bank at 11.8%.
Anytime Berkshire goes over 10% for any particular institution they become a major decision-maker on board. In the case of banks, any time Berkshire exceeds a 10% stake they would automatically become a “bank holding company” in which case they would be entitled to receive instructions from and operate under the Federal Reserve’s mandates.
It could be a possibility that Berkshire sold out the banks to keep cash at bay, and perhaps he doesn’t view them as undervalued or fairly valued anymore.
His reduced stakes in Visa and Mastercard was one that personally had me in shambles since these two companies are an oligopoly when it comes to the payments arena and is transitioning into fintech in the near future.
The filings may go against the grain of what Mr. Buffett has always preached, but the objective in investing is to be the “odd-one out”. After all, more than 90% of traders and investors lose money and if being in the top 10% requires one to go against the norm, it portrays an individual who is prepared to hedge his/her position.
The abrupt changes made by Berkshire in the third quarter of 2020
Berkshire Hathaway had been a net seller of stocks in the second quarter but the scenario has reversed as we review the 13-F filings for the recent quarter. The firm has sold $12.821 billion worth of securities but acquired $17.606 billion worth of stocks mostly in the pharmaceuticals space.
Purchases like Pfizer might seem obvious to a class of investors who expect pharmaceutical companies to capitalize on the pandemic. This also includes companies like AppVie who also happen to manufacture syringes and medical devices.
Trimming stakes in banks and other financials might have to do with where we are in the business cycle as opposed to banks experiencing a reduction in profit levels.
He even bought into an IPO, Snowflake after half a century since the Ford Motor IPO which shows his change in mindset either getting accustomed to the new era or very simply those might have been calls taken by Ted or Todd.
A 3.7% reduction in Apple might not be a big deal given the fact that the firm’s biggest holding still centers around the iPhone manufacturer.
What’s really interesting is that in each of the investments made in the pharmaceutical companies, the amount invested is roughly equal.
This might signal a move towards diversification or very simply he is not too sure as to how the markets might play out.
Even though he recently suggested that the market cap-to-GDP is way overvalued according to his analysis (currently around 2:1), his actions of pouring money in stocks may signify his position towards his firm belief in “Corporate America”.
He has spent a whopping $9 billion on buying back Berkshire stock! A clear indication that he is indeed skeptical of the future market movements and the only thing he finds solace in is his own company, Berkshire Hathaway.
This means that during the span of the last quarter, there was a period of time when “The Oracle of Omaha” genuinely believed that Berkshire Hathaway was undervalued. If there’s anything we know of Mr. Buffett, it's that he won’t buy into anything which he doesn’t believe to be undervalued, even if it’s his own company.
Thus, following his actions, not his words might prove to be profitable as long as the Federal Reserve keeps interest rates at bay.
Disclaimer: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.