Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Warren Buffett can usually be relied upon to ignore the pessimism of crowds.
Back in 2008, in the midst of the financial crisis, the legendary investor bullishly backed the stock market when everyone else was headed for the exits. "A simple rule dictates my buying”, he wrote at the time. “Be fearful when others are greedy, and be greedy when others are fearful."
He backed that up by using the big fall in shares to purchase more of his favourite companies at knock-down prices.
As a new crisis unfolds, however, the Sage of Omaha is struggling to muster the same confidence in shares. This past weekend saw Berkshire Hathaway, the conglomerate Buffett still heads, hold its annual shareholder meeting in lockdown. Deprived of the usual 40,000-strong crowd which the event usually attracts, Buffett was notably downbeat.
Berkshire Hathaway booked a near $50billion loss - an expected effect of the stock market crash this year - but it was Buffett’s lamenting of the lack of new opportunities from lower share prices that stood out. He saw no imminent deals to be struck and confirmed that large positions in US airlines had been sold. Berkshire Hathaway had held stakes in a number of airlines, including 11% of Delta Air Lines, 10% of American Airlines, 10% of Southwest Airlines and 9% of United Airlines.
He said: “We made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss… We will not fund a company … where we think that it is going to chew up money in the future.”
Buffett’s dilemma reflects the emerging reality in the stock market. There is a group of companies that can withstand the crisis very well because they will not be hurt by lockdown restrictions - in fact they may gain from them. That includes the tech companies that depend on online rather than real-world economic activity. These include Apple, Berkshire Hathaway’s largest position.
Yet these companies went into the crisis already highly-priced and have become even more so. That puts off a valued-focused investor like Buffett from buying any more of them.
In more normal times, this situation would put under-valued companies on his shopping list. But this time round those under-valued companies face such uncertainty about their future operations that potential buyers like Buffett cannot muster the confidence to invest.
In the case of airlines, who can say when - or if - pre-Coronavirus flying patterns will resume? There are many sectors which face similar uncertainty about their immediate future. Not all of the worst-case scenarios will come to pass, of course, but the lack of visibility on what comes next makes investment decisions now even more fraught with danger.
Ordinary investors face many of the same obstacles as Buffett, but there are important differences too. Berkshire Hathaway is now of such scale that, even in happier times, new investment opportunities that will make a meaningful difference to its returns are few and far between. Small investors - even when investing via funds - have a bigger universe of stocks from which to find pockets of growth.
And - despite his own current lack of opportunities - Buffett remained positive for small investors willing to ride out the current volatility and invest in the US market on a long-term time horizon. “Nothing can basically stop America”, he said. “The American miracle, the American magic has always prevailed and it will do so again ... In World War II, I was convinced of this,” he added. “I was convinced of this during the Cuban Missile Crisis, 9/11 and the financial crisis.”
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.