Buffet keeping his powder dry
The Oracle of Omaha hasn't done much buying in 2020, despite a 35% stock-market plunge earlier this year. Warren Buffett did the same thing in similar circumstances more than three decades ago.
The massive sell-off in stocks led many investors to wonder whether famed investor Warren Buffett would capitalize on this opportunity to make some big stock purchases -- or even acquire entire companies. After all, Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) insurance subsidiaries ended 2019 with a whopping $125 billion of cash and U.S. Treasuries available to make investments.
Instead, at Berkshire's annual meeting earlier this month, Warren Buffett revealed that the conglomerate had been a net seller of stocks year to date. Berkshire Hathaway only made minor stock purchases -- at least by Berkshire standards -- and they were more than offset by Buffett's decision to bail out of airline stocks.
As Berkshire Hathaway's cash pile has grown in recent years, Warren Buffett has talked repeatedly about looking for "elephant-sized" acquisitions. However, he has been waiting for attractive companies to become available at reasonable prices. As usual, Buffett has been careful not to get greedy by buying "cheap" stocks with weak business fundamentals.
Buffett reiterated this point a little over a year ago in his annual shareholder letter:
"In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition."
Indeed, Berkshire Hathaway's cash pile increased significantly last year. Aside from the lack of attractive acquisition candidates, Buffett also struggled to find reasonably priced stocks to buy. And even though the stock market's plunge earlier this year was deep and traumatizing, it didn't change this dynamic.
Naturally, many Berkshire Hathaway investors were disappointed that Warren Buffett didn't find anything to buy during this year's market crash. After all, it seemed to many that this was the moment they had been waiting for, when Buffett would finally move Berkshire's massive pile of cash and low-yielding Treasuries into companies that could deliver fantastic long-term returns.
Shareholders shouldn't be too disappointed, though. Buffett's belief that stocks were overvalued at the end of 1987 turned out to be wrong. Over the following 20 years, the market posted a total return of nearly 500%, turning $10,000 invested in the market at the beginning of 1988 into nearly $60,000 by the end of 2007. That works out to a solid 9.3% compound annual growth rate (CAGR). Yet the same $10,000 invested in Berkshire Hathaway stock at the beginning of 1988 would have grown to nearly $200,000 over that period: a 15.8% CAGR!
In short, Buffett's failure to act quickly and decisively immediately after the market plunged in 1987 didn't hurt shareholders at all. It may have even helped. Just a year later, the Oracle of Omaha found two of the most successful investments of his career, buying shares of Coca-Cola and Freddie Mac. He continued to find attractive opportunities to deploy Berkshire Hathaway's capital over the next two decades.
High-quality stocks may not be cheap enough to make Warren Buffett pull out his elephant gun. But between its existing collection of premier businesses and a massive war chest that can be deployed whenever compelling investment opportunities do turn up, Berkshire Hathaway stock is still an excellent choice for long-term investors.