The road trip is cancelled, but the roadmap is intact
Normally at this time of year, Himalaya and one or more of his sons set out on a 3,500km roundtrip journey to Omaha, Nebraska to attend the annual general meeting of Berkshire Hathaway (this year’s meeting is being held Saturday May 2). Due to COVID-19, the in-person shareholder’s meeting has been cancelled but will be live streamed instead. Unlike other shareholders meetings, which tend to be short formal affairs, Berkshire’s meeting is a six-hour event (with a break for lunch) where shareholders can line up and pose questions to Warren Buffett and Charlie Munger. The meeting is followed by a giant barbeque. For anyone passionate about investing and economics, this annual pilgrimage holds a special place in the calendar. The father/son bonding time is equally special.
Earlier in the year, before COVID-19, the themes of questioning that Warren and Charlie were likely to have faced would’ve included: sustainability of high equity valuations, when and how will Berkshire deploy its US$150+ billion of cash, and who will succeed Warren and Charlie. Despite the massive dislocations in the economy triggered by COVID-19, these themes remain just as relevant. Given a long track record of being patient, opportunistic investors, we expect that Berkshire has been as busy as us in deploying cash into well run companies that traded at attractive valuations over the past two months. Future regulatory filings will reveal just how active Warren and Charlie were.
The strong bounce in the market since March 23 lows has surprised many, including us. The pace of the recovery is in stark contrast to the reality that has unfolded in the economy where millions of newly unemployed and struggling small- medium-sized businesses have lined up for a vast array of emergency government aid.
We have always believed that markets are forward looking by pricing-in what is ahead rather than what is happening right now or what has already passed. If we were to peer through the market’s lens, the dramatic divergence between market performance and current economy could be explained as follows: virus containment efforts have been effective, global economies are in various stages of reopening, central banks and fiscal spending are helping bridge the economy for the next few months until a sustainable recovery takes hold, and corporate earnings in 2020 will be very weak but should recover in 2021. What we do not see reflected in the market’s outlook is the possibility of a “second wave” of COVID-19 infections. And therein lies the risk.
We are very comfortable with the measured portfolio adjustments we have made over the past two months. But the overall risk/reward relationship has become less attractive, forcing us to become more patient and discerning about further equity purchases. Since some sectors have done better than others, we expect to continue finding opportunities to invest in.
The road trip to Omaha is off the table, but we continue to follow our investment strategy roadmap. As always, we hope that you and your families remain healthy and safe.
