Commentary on Political Economy

Thursday, 9 July 2020


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.
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.
Add to shortlist
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.

Add to shortlist
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.

No comments:

Post a Comment