A fading legend: Warren Buffett used to move markets -
now he barely causes a ripple
Senior business columnist
July 9, 2020 — 11.49am
Something
unusual happened this week. At the start of the week Warren Buffett announced
a $US10 billion ($14.4 billion) acquisition.
The market, however, just noted it and moved on.
For
decades Buffett’s moves and words were pored over and analysed forensically by
US analysts and investors for insights into the judgments of the "Oracle
of Omaha" on the state of the market.
A
large purchase by Buffett’s Berkshire Hathaway was regarded as a clear
"buy" signal by the rest of the market. It changed sentiment and
moved markets.
Berkshire’s
purchase of Dominion Energy for $US4 billion plus the assumption of $US5.7
billion of debt – its biggest deal in four years – caused, however, barely a
ripple of discussion.
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That could be regarded as an indication of the extent to which
Buffett has lost respect within the markets after years where his once-golden
touch appears to have deserted him.
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His ill-fated plunge into a sector he once shunned, airlines -
"If a far-sighted capitalist had been present at Kitty Hawk he would have
done his successors a huge favour by shooting Orville down" he said in
2007 - cost Berkshire billions when it dumped its holdings in Southwest,
American, United and Delta earlier this year.
His big investment alongside private equity in Kraft-Heinz was
another flop, as was his $US10 billion funding of Occidental Petroleum before
the oil price crashed.
In the first quarter of this year Berkshire lost almost $US50
billion as those investments soured. It hasn’t helped Buffett that he sold the
airline stocks at the bottom of the market and that they have subsequently
recovered some of their losses.
The Dominion deal is of particular interest, albeit not one that
moves the dial for a conglomerate with $US760 billion of assets and which has
been sitting on $US137 billion of cash.
That’s because it is in some respects an uncharacteristic deal
for Buffett, whose big transactions tend to be of the "straw hats in
winter" or counter-cyclical kind.
The Dominion deal, coming after the market has rebounded by more
than 40 per cent, exacerbates the perception of the missed opportunities and
the sense that Buffett isn’t remaining true to his convictions.
Berkshire made massive profits in the global financial crisis by
effectively bailing out, or at least shoring up, stressed financial
institutions and industrials like Goldman Sachs, Bank of America, Dow Inc and
Harley-Davidson. It supplied emergency funding on terms that minimised its
risks and maximised its returns, gilding Buffett’s reputation.
This time, during the pandemic and the 34 per cent plunge in the
market from mid-February to late March, Buffett kept his massive chequebook
closed.
His explanation for Berkshire’s inaction was that the US Federal
Reserve Board’s speedy and unprecedented actions, pouring trillions of dollars
of liquidity and credit into the system, had provided companies with a cheaper
and easier option than dealing with Berkshire.
The Dominion deal, coming after the market has rebounded by more
than 40 per cent, exacerbates the perception of the missed opportunities and
the sense that Buffett isn’t remaining true to his convictions.
Buffett is a value investor. Ideally he buys distressed assets
in stressed markets at distressed prices. Dominion operates within a stressed
sector – oil and gas – but is essentially a utility, owning gas pipelines and
storage facilities. It fits within the sprawling Berkshire portfolio but
doesn’t appear to provide any indication of an underlying investment strategy.
The problem for Buffett - and it has been once since markets
recovered from the financial crisis and spiked to record levels during the
early years of the Trump administration, with its tax cuts and surges in government
spending - is that the market has been one that is heavily tilted towards
growth investors and away from value investors.
Technology stocks have been the standout performers in the
market’s surge since its nadir in 2009. Buffett, who has said he doesn’t invest
in companies that he doesn’t understand, only belatedly began investing in
Apple (now by far Berkshire’s biggest investment) and more recently Amazon,
which he probably regards more as established branded consumer products today
than as the tech companies he once saw them as.
It’s been a difficult and confusing decade for value investors
and particularly for a value investor who invests on the scale Buffett needs to
invest to have any impact on Berkshire’s performance.
The scale of central banks’ continuing interventions in their
financial systems and economies over the past decade has distorted markets and
investor tendencies and created settings that have increasingly challenged the
convictions the 89-year-old has held to throughout his remarkable career.
If there is no pricing for risk and central banks have put a
rising floor under equity and debt markets Berkshire’s opportunities for taking
advantage of moments of distress for the cash-generating companies he has
traditionally favoured are very limited, hence his relative inactivity in
recent years.
In the past the Dominion acquisition would have been seized on
as a confirmation from the Oracle that the market’s resurgence would be
sustained.
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Now it is being interpreted as either a mistimed surrender of
his convictions - an admission of error that provides little direction for the
wider market - or a deal whose relative insignificance provides no signal at
all.
Buffett, of course, could have the last laugh and restore his
reputation if the surge in coronavirus infections in the US overwhelms the
responses of the Fed and Congress to the pandemic, the market really tanks and
again provides the kinds of opportunities that made him the world’s most famous
and most-admired investor.
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