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The Oracle Spoke – The Business World Listened (#68)


On this past Saturday, May 2nd, 2020, the legendary investor-businessman, Warren Buffett, held his much anticipated ‘Annual Shareholder Meeting’ for Berkshire Hathaway (the Company that he built and is Chairman of), and due to the COVID-19 pandemic lock-down, for the first time, this meeting took place ‘virtually’. To say that the Berkshire Hathaway’s annual shareholder’s meetings are one of the most anticipated events in the business world, would not be overstating it. And, the reason for this anticipation, outside of Berkshire shareholders always is that every person interested, in the world of business, in investing, or in hearing uncommon wisdom, wants to hear the Oracle of Omaha speak, and drop his pearls of wisdom before the (in comparison) piggishly ignorant investment world.


Even in the world of extraordinary men and women, Warren Buffett’s reputation is unprecedented, and his influence in the world of business the most far-reaching.


On Wall Street, and ‘Wall Street equivalents around the World’, unquestionably populated by some of the best educated, brightest, most innovative, ambitious, aggressive, greed driven over-achievers, Warren Buffett stands out - not as one of them, but apart, and above them - in his achievements, his folksy humility, his uncommon wisdom, his decency and his old-fashioned ambition to build wealth honestly, responsibly, and over time. And doing it that way, he has beaten every fast moving hotshot(s) on Wall Street, decade after decade, after decade.


His reputation on the ‘Wall Streets of the World’ is such that no one commands as much respect, overall, as does Buffett, for over as long a period of time as he has.


That is why, during this period of unprecedented global economic and financial markets turmoil, volatility, deep uncertainty and fear, there was such pent-up anticipation to hear what Buffett would have to say about the pandemic and its effects on the economies, the financial markets, the direction of the financial markets from here-on, and the long-term impact of this unprecedented time. And because this particular shareholder meeting was perforce held virtually, it had a far greater live audience than the regular meetings that are held in Omaha, Nebraska, and are like a carnival, and an annual pilgrimage of devoted almost worshippers-like Berkshire shareholders.


Over the years the Berkshire shareholder meeting has attained such iconic status that it has come to be known as the ‘Woodstock of Capitalists’. This time even those not lucky enough to own the practically gold-plated Berkshire Hathaway shares, had the good fortune to ‘attend’ and listen in.


Warren Buffett is now 89 years old, but still at the active helm of Berkshire Hathaway, and seemingly very sound of mind and body. As one commentator later wrote, the thing she was most impressed by was the fact that Buffett led a shareholder meeting (almost single-handedly), for almost 4.5 hours. [As an aside, I share Buffett’s birth-day (not however the year), but unfortunately it is the only thing we have in common.]


Now, as it is said, to the meat of the matter:


Warren Buffett started his meeting by addressing the trepidation that all in the US are feeling currently, particularly as investors. He addressed the uncertainty empathically, by what was to be his underlying theme, a statement he himself had had coined years ago – ‘Never, ever, bet against America!’


He pointed out that even the threat of a ‘Global Pandemic’ had been anticipated and spoken to by Bill Gates some years ago at a Ted Talk, and late last year a ‘Study’ on the same subject had been published by Senator Sam Nuns and others but had gotten scant attention. He said that even such seemingly existential events, are anticipated and brought to our attention by some, but generally ignored by most; and then, when they do occur, they cause serious damage, but do not stop, or reduce, the ‘enormous tailwind of America’.


He then related a brief summary of the history of America with the aid of very simple slides – three to four black ink sentences on a sheet of white paper, from its organization in 1776, to its most important ‘bumps in the road’, and its subsequent recoveries, which eventually led to the present day America – greatly bruised, but certainly not permanently broken in 2020. And through his special folksy, rambling stories, he emphasized the exceptionalism of America, through its brief and volatile history, and how it has always overcome and continued to grown, in spite of extraordinary and at times existentially threatening events - to eventually always come out on top.


Warren Buffett’s consistent message was always: ‘Never, ever, bet against America’.


In his meandering story there were some important messages and some rather fascinating historical information, useful to know, if history is being repeated. He called America an extraordinarily young country, ‘some 231 years old, which had in 1779 an estimated population of about 3.9 Million (of which 0.6 Million of whom were slaves), and half of 1% of the world’s population lived in the 13 States’.


At that time, taking the 1803 Louisiana Purchase price of $15 Million as a gauge to approximate value, he guesstimated America’s worth at that time to be about a $1.0 Billion (best-educated research and guesses of Warren’s). He then informed, that in 2020, the estimated wealth of America was ‘well over a $100 Trillion – at least $100,000 per each original $I.00 - perhaps a 5,000 per 1 gain in real terms.’


In trying to put the depths (and deaths?) of the current personal and financial difficulties in perspective, he pointed out that 74 years after its start, America was divided in two, in a violent Civil War, and its President at that time, had wondered out loud: “testing whether that nation, or any nation, so conceived and so dedicated, can long endure”.


Buffett, of course, always and wisely refrains from directly addressing the politics of-the-day, but those of us who do not have any qualms about it, cannot but note, that America’s current President, Trump, works overtime, day and night (through his infamous nighttime tweets), to divide America in two, again, as his supporters have no hesitation in forming militias, arming themselves with guns and confederate flags, and threatening anyone who does not align with Trump. But, perhaps that was the point that Buffett was making - America will overcome the ravages of the Pandemic, despite the divisive best-efforts of Trump?


Buffett pointed out that during the Civil War, approximately, ‘16 million males were killed - Perhaps 10 million between the ages of 18 and 60 – which represented about 6% of the male working population of that time’. He went on to marvel that America went on from that existential catastrophe and became the amazing prosperous country that it is today, which was, according to him, ‘one of the wonders of the world, perhaps THE Wonder of the World’.


Next, he highlighted the subsequent major crisis in the history of America, which was the Great Depression of 1929; he used the Dow Jones Industrial Average (DJIA) as a yard stick to highlight some key stock market lessons.


On September 3rd, 1929, the DJIA closed at 381.17.


He recounted that people were very happy at that time, buying stocks on margins, it was the roaring ‘20s, and the DJIA was driven by the exuberance of new technologies, such as the cars, airplanes, and travel coming of age, new appliances, and the use of telephones, etc. ‘It was a happy place’.


Then, in a couple of months after September 3rd, the DJIA was almost cut in half - and on November 13th, 1929, it closed at 198.69, a 48% decline.

He went on to say that in about nine months, at about the time he was born, August 30th, 1930, the DJIA had recovered about 20% of its fall (hmm, sounds a bit like today, doesn’t it?) and went on to climb another 1-2% for the next ten days or so – ‘but that was it’. Two years later the DJIA went from 240 to 41, a drop of 83% - or approximately 89% from its September 19, 1929 peak of 381.


Buffett continued, that in the fall of 1930, nobody thought they were in a Great Depression, they thought it was just another Recession.


The Depression lasted approximately 10 long years and mentally so scarred the American people that it took approximately 20 years (1951), before the stock market recovered the levels it had been at in 1930.


Buffett went on to state that finally when the economy and the stock markets really started to move, and when the Dow got to about 450, past the previous high of 381 in 1929, people had still retained that fear, because of the memory of what had been triggered (a massive crash) after it reached that high. People were afraid that another crash might be triggered now that the Dow was above 400 in 1955. In fact, a public inquiry was held, to ascertain if the stock market had gotten too high and posed a threat again.

By recounting these events, Buffett was showing that America survived some existential threats in its short history as a country, both to its economy and its stock markets, and survived both, to eventually thrive and prosper to ‘unimaginable heights’. In addition, he was also reminding everyone, that things can easily go from bad to worse – from a 48% drop in 1929, a pullback of 20% in 1930 to 240, to an eventual disastrous drop of 83% in 1932 to 41 - a total wipe-out of 89% from the peak of 381 in 1929. It took 20 years for the DJIA to achieve that peak again.


Buffett said such disastrous wipe-outs are always possible in a single stock, but this was for the entire spectrum of American industry, which was simply unprecedented. The point was being made that in the current situation, the stock market could go up from here, but that it could also go down a lot further, and stay down for a very long time. Refuting the popular sentiment at such times that, ‘this time it is different’.


Addressing the current conditions, he stated as is his habit, that he was not at all sure how things will turn out with the pandemic, or with the direction of the stock markets, except to say that he knew that in the long-term, America will survive and continue to thrive with its unstoppable tailwinds of exceptionalism. Buffett expressed that sentiment throughout the meeting, that while in the short-term absolutely nothing was certain, and the bad can always get worse, but in the long-term, investing in the exceptional capability and productivity of America was always a winning bet, and betting against America was never, ever, a good idea.


Throughout the recounting of past events and the serious bumps along the road, leading up to the present massive ‘bump’, and in spite of his overarching optimistic emphasis on the resilience and exceptionalism of America, one could sense his pessimistic view of the present economic situation, and the strength and direction of the stock market.


One got the impression that Buffett was subtly flagging the distinct possibility of a deep and prolonged stock market correction, similar to the one that followed the 20% bounce after the initial fall in 1929, and trying to temper the sentiment that everything, the economy and the stock market will bounce back quickly, in a ‘V’ shaped recovery.

One could be entirely wrong in the take-away of Buffett’s cautionary message, but questioning of his recent actions in Berkshire Hathaway, reinforced that strong impression.


In getting to the actual business of Berkshire’s, and after taking care of the formal aspects of a shareholder meeting, Buffett opened the meeting to phoned-in questions, and of course he was asked about his thoughts on the current situation. His response was pretty uniform; he said he did not know what was going to happen (or certainly would not say) in the economy, or the stock markets, but kept stressing that almost anything is always a possibility and that is why Berkshire was always run to withstand the worst case scenario, and therefore never operated with any leverage. He stressed that investing with leverage (debt) was a very bad thing, as in the worst case scenario, if it came true, however improbable it may have seemed, that leverage could really hurt you, perhaps even fatally (financially speaking). Therefore he stressed that even though Berkshire was sitting on a cushion of well over $124 Billion in cash, it was not going to spend any of it at this time even with the markets being ‘down’, but be prepared, and always stay prepared for the absolute worst.


That sentiment, to those who chose to take it that way, was the ringing of an alarm bell, signaling the possibilities of the current situation getting worse rather than better, in the near-to-mid-term. This message of caution, for us, was reinforced by the fact that Buffett confirmed that he had sold all of the stock of the 4 major airlines he had bought not too long ago, for a loss. And, when questioned about it, he made it clear that after the devastating hit from the COVID-19 Pandemic, he now considered the airline industry to be a bad investment, as he did not see them returning to profitability for a very long-time. That reason of course became to us another indicator for his outlook for the general economic recovery, and the speed and extent to which he thought at least some large and key businesses were going to return to ‘normal’.

Buffett was pressed as to why Berkshire, in spite of the mountains of cash it was sitting on, did not enter the markets aggressively to buy when they fell 30% recently. And his response was that apart from holding an extraordinarily strong position in times of crisis, and being always prepared for it to get worse, he didn’t see any real attractive values even with the markets being down, as now.


A similar logic was forwarded when some questioned why Berkshire had stopped buying-back its own shares, when before the Pandemic hit, it had been engaged in its stock buybacks. His answer was again revealing of his inner convictions. He stated that even though he had been buying Berkshire stock through share buybacks a few months ago, he now did not think that Berkshire stock presented particularly attractive values, and he was quite willing to wait for a time when it did. That to us was very a strong indicator of his innermost belief that he expected the stocks to go down further – perhaps even a lot further.


So, while Buffett took every opportunity to stress that in the long-term he categorically believed, and has believed all his life, that America will always overcome any and all obstacles on its road to ever greater prosperity and greatness, and the best way to participate in that greatness was to buy US equities (stocks) through a low fee, broad based Index Fund, he also strongly cautioned that on that road to greatness and prosperity there will be some very big unexpected bumps, as now, and we should always be prepared for them. And, we should always be prepared for things to get much worse than we think they can, because they can, and sometimes they actually do. He repeated that message many times - invest but it is risky, so do it with extreme caution, and through a low fee index fund, do not seek ‘professional’ advice from those who charge for it, because it is self-serving - think for yourself and play it safe by investing broadly in American industry, for the very long-term.


To those of us who wanted to get a sense of where we were and where everything was going, economically and financially speaking, according to Buffett, he did not disappoint. Through his stories of America’s short but eventful history, he made clear the dangers of expecting a quick rebound and prepared us for a possible prolonged downturn. His strong positions on leveraged investing and the futility of trying to pick tops and bottoms in markets, were timely warnings in this ultra-low interest rate environment, when some may be tempted to ‘borrow to the hilt’ to invest in the supposed ‘bottomed-out’ markets.


Buffett strongly demonstrated that by cashing out of losing bets (as in the airline industry) and adding to cash, and by retaining maximum cash, he and Berkshire were maximizing their gun-powder, and ‘keeping their powder dry’, for bigger opportunities to possibly follow in these very uncertain times, and in these very volatile stock markets. It would behoove us lesser mortals to listen to the ‘Oracle of Omaha’.


Caution: The above is our analysis of Warren Buffett’s assumed beliefs and indicators, and we may be entirely wrong, so ‘Think for yourself’.

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