During the Great Recession in 2008, Warren Buffett’s massive investment in the financial sector acted as a turning point for the stock market. The Oracle of Omaha’s decision to jump back into equity markets sent a signal to investors— the worst is over.
So where is he today with the market down nearly 15%?
Speculation over whether or not Mr. Buffett spent the $128 billion that Berkshire Hathaway (NYSE: BRK.A) hoarded has been rampant. But unless Mr. Buffett speaks up in the weeks ahead, Berkshire’s May 2 quarterly results are the only way to know for sure whether that cash was put to use.
If he did invest, it would send a buy signal to everyone waiting on the sidelines— just as it did in 2008. If not, the Dow could fall further.
Would Warren Buffett jump back into the market without announcing it? Some say yes— perhaps the famed investor is ready to pass the torch to investors like Bill Ackman, who’ve been outspoken about the stock market during the pandemic.
That’s unlikely. If Mr. Buffett passes a torch to anyone, it’s going to be someone at Berkshire . The last thing he wants is for Berkshire to be buried alive by firms perceived as more current when he departs.
If he believed it was time to buy, Warren Buffet – or someone at Berkshire – would speak. He wouldn’t let Ackman get all the credit for timing the turnaround.
There’s a reason Warren Buffett hasn’t indicated that it’s time to buy— because it’s not.
The underlying principle of Buffett’s investment strategy is to be greedy when the market is fearful and fearful when the market is greedy. People often simplify that to mean “buy the dip,” which works in the vast majority of scenarios— but not this one.
Warren Buffett would likely concede that there are a lot of quality companies that appear to be on sale right now, but that’s only half of the equation. The price side of P/E is getting lower, but the earnings part of that ratio is still a big question mark.
If anything can be gleaned from the train wreck that’s been Q1 earnings, it’s that no one is sure what the future holds . The same refrain has been echoed by management across every sector— until the trajectory of the pandemic becomes more clear, they can’t make a reliable prediction about the future.
That lack of visibility makes it difficult to know whether or not you’re truly getting a bargain. Berkshire Vice Chairman Charlie Munger said as much just a few days ago, telling the Wall Street Journal that caution was the best strategy in the current market.
We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].
Many were surprised— after all, isn’t this precisely the type of opportunity about which Warren Buffett preaches? But as Munger hinted, Berkshire isn’t going to be greedy alongside the rest of Wall Street.
That’s not Buffett’s style.
It might sound counterintuitive to consider a market that’s down 15% driven by greed— but the “goody, goody, everything’s going to hell” attitude among market bulls isn’t exactly fear.
Consumer sentiment shows that investors haven’t fully absorbed the impact that coronavirus will have on U.S. businesses. Data from the Fed show that in March – as the economy ground to a halt – investors’ outlook for the future went up.
Valuations are higher now than they were in December 2018 when the market pulled back on trade war concerns. But today, a prolonged trade war with China is nearly inevitable, the global economy has ground to a halt, unemployment is at all-time highs, and most agree that coronavirus is going to continue to cause economic shutdowns far into the future.
The outlook for businesses is undoubtedly worse than it was back in December, and this time Trump can’t save us with a relentless cycle of tweets promising an end to the chaos.
In 2008, Warren Buffett’s New York Times article made history. He outlined the merits of paring down cash positions as the Fed injects money into the economy, citing inflationary pressure . But over a decade later, the situation is far different. Despite the government throwing unprecedented amounts of money at the problem, we’re seeing signs of deflation.
The bottom line is that although “buy the dip” certainly has a place in Mr. Buffett’s toolbox, it doesn’t apply now— at least not yet.