Tag Archives: Commentary

Commentary: Buffett Affirms Berkshire’s 3 Pillars Stand Strong

Berkshire Hathaway is so diversified that it’s impossible for it not to be impacted adversely by COVID-19. Automobile retailing through its Berkshire Hathaway Automotive network of dealerships, furniture retailing (Nebraska Furniture Mart, Jordan’s, Star Furniture, RC Willey Home Furnishings), and the See’s Candies retail stores, are just a few of its companies that are facing slumping revenues.

At the Berkshire Hathaway annual meeting held on May 2, Warren Buffett noted that the swift temporary closure of See’s retail stores in late-March left it with a huge inventory of Easter candy that will go unsold.

“…we were in the midst of our Easter season and Easter is a big sales period for See’s. And I don’t know whether we were halfway through, but we weren’t halfway through in terms of the volume is going to be delivered because it comes toward the end. And essentially we were shut down and we remain shut down. The malls that we’ve got 220 or so retail stores and we’ve got a lot of, Furniture Mart sells our candy. But the Furniture Mart’s closed down. And so See’s business stopped and it’s a very seasonal business to start with. So we have a lot of seasonal workers too that come in, particularly for the Christmas season. But we have a lot Easter candy, and Easter candy is kind of specialized too. So we won’t sell it. And we produced a good bit of it.”

Getting Nervous? Don’t Be

However, amidst the bad news was a key point that Buffett emphasized. The three main pillars of Berkshire Hathaway—its insurance, freight railroad, and energy business, are all strong and will continue to generate cash.

“Our three major businesses of insurance and the BNSF railroad, railroad and our energy business, those are our three largest by some margin. They’re in a reasonably decent position,” Buffett explained. “They will spend more than their depreciation. So some of the earnings will go, along with depreciation, will go toward increasing fixed assets. But basically these businesses will produce cash even though their earnings decline somewhat.”

Berkshire’s businesses are so strong because planning for the worst case scenario is at the heart of Buffett’s philosophy. Buffett explained that they even plan for more than one disaster.

“I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.”

And if that’s not enough to reassure you, don’t forget that Berkshire has $137 billion in cash.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway and BYD, and this article is not a recommendation on whether to buy or sell a stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Buffett’s Cash Pile Not a Source of Ridicule Anymore

(BRK.A), (BRK.B)

Up until a few weeks ago, Berkshire Hathaway’s enormous pile of cash, which had reached $125 billion, and was growing $1.5 billion a month, was taken by many as a sign of failure on the part of Warren Buffett.

Increasing cries for a dividend, or increased buybacks (despite the stock sitting at or near record highs) was just some of the popular chatter.

What a difference a few weeks makes.

With the markets experiencing extreme volatility, and many businesses forced to close or facing plummeting demand, Buffett’s patience finally looks like it has met conditions where his value investing strategies can excel.

As share prices fall, Buffett clearly has the chance to use his elephant gun to bag his elephant, as he likes to call the acquisition of a major company, which is something he hasn’t done since acquiring Precision Castparts in 2016.

The opportunities are many, as valuations have retreated so significantly that Berkshire now holds more cash than the market valuations of more than 450 companies in the S&P 500, over 80 in the Nasdaq 100, and 11 that make up the Dow 30.

In addition to acquiring his elephant or two, Buffett will certainly have opportunities to help companies shore up their balance sheets through his favorite method—receiving preferred stock that pays generous interest, and receiving warrants for common stock purchases.

The latter, as in the case of his rescue of Bank of America during the Great Recession, pays off handsomely once the economy and stock prices have recovered. As proof, Berkshire now owns just over 9.9% of the bank.

It will be interesting to see what strategies Buffett employs, and whether there are more opportunities in the purchase of whole companies, or in grabbing generous chunks of a wide range of companies. He might even increase his buyback of Berkshire stock, because owning more of one of the world’s healthiest and diversified conglomerates makes sense at these prices.

Perhaps investors big and small should do the same, as Berkshire’s P/E ratio of sat at only 5.38 as of Friday, March 27.

Let’s not forget that in addition to being poised for Berkshire’s expansion while others are contracting, Buffett has also insured the short term and long term health of Berkshire itself. He has always held $20-$25 billion in reserve for the conglomerates own needs during the worst of times.

These might be the worst of times for some, but for Buffett, who famously said in his 1986 Letter to Shareholders, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” these are the best of times to invest.

In a couple of months, Berkshire’s next 13F filing will reveal just how much stock he and his trust lieutenants Todd Combs and Ted Weschler have acquired, and we may know even sooner if an elephant comes within range.

It will be interesting to see how greedy Buffett gets.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.