Warren Buffett is optimistic that the US will recover from this pandemic and said he will always place his bet on America. He has been reasonably quiet during the lockdown. He acknowledged that the coronavirus outbreak will have a significant impact on his investments and economy. Let us understand how Warren Buffet is dealing with Covid-19 impact.
Warren Buffett on Coronavirus
Warren Buffett is an experienced investor and seen his shares of ups and downs. Yet, he is very optimistic about the US economy. He believes that “America’s best days lie ahead”. He keeps on repeating it in the annual letters to the shareholders.
But he has been reasonably quiet since the coronavirus outbreak. In the annual meeting, Charlie Munger (the business partner of Warren Buffet) said it bluntly that they won’t be reopening some of their small business after this outbreak. However, he is willing to make a big acquisition which he has not done since 2016. He has not provided financial support to companies as he did during the 2008 financial crisis. The reason is he saw nothing attractive enough even after the recent bear market. Thus, it seems that he is not willing to take risks amid the uncertainty in the stock market.
Some major declarations were made in Berkshire’s annual meeting which will help us to understand how Berkshire is dealing with the coronavirus outbreak.
Highlights of Berkshire’s Annual Meeting
Berkshire reported a net loss of $49.75 billion first-quarter net loss. It reflected huge unrealized losses on common stock holdings such as Bank of America Corp & Apple Inc. stocks. The virtual meeting was conducted because of the lockdown & Yahoo Finance was the exclusive online host. The highlights of Berkshire’s Annual meeting conducted on May 2, 2020 were:
- Warren Buffet sold all his four airline stocks and quit the airline sector. Buffett always had a tormented history with the airline sector. He already faced a huge loss in 2001 and swore not to invest again. But he forgot the promise and invested again in 2016.
- Warren Buffett sounds cautious. He believes that no one can predict how the market will move tomorrow, next month, or next year. If you see Berkshire’s cash funds had grown to $137.3 billion at the end of March, up from $128 billion at the end of December. It shows that the company isn’t doing much investing as a result of the coronavirus outbreak.
- The company is focusing on the strategy of repurchasing stocks. In 2020, It repurchased Class B buyback shares worth $1.6 billion. The price range was between $214 & $226.11.
- The investors asked if the company would send money to operating subsidiaries if required. The company has sent money to a few subsidiaries but it is not going to send money indefinitely. It will analyze the situation and then make a decision.
- The investment in the oil stocks is equally a bad bet as airline stocks. The company made an investment worth $10 billion in Occidental Petroleum at a price of $58 per share in May 2019. The price went down to $15 per share as a result of drop in crude oil prices.
The major learning was how Warren Buffett is a great source of inspiration for all of us. The 89-year-old went on for four and a half hours & answered the investor’s questions. He teaches how one can make the most of their capabilities and achieve wonders in life.
Berkshire Exits Airlines
The major highlight of the Berkshire meeting was that the company has quit the airline sector.
Let us understand this move in detail
Warren Buffett had a bad history with the airline stocks. He faced a huge loss from US Airways investment in 2001. He literally if he feels the urge to invest in airline stocks, he would call an 800 number. After making the call he would say-“Hello, my name is Warren, and I’m an air-o-holic”
Apparently it seems he lost the number and he made an investment in the airline stocks in 2016. Berkshire became the largest shareholder of Delta Air Lines Inc., the second-largest owner of United Airlines Holdings Inc. and Southwest Airlines Co., and has the third-biggest stake in American Airlines Group Inc.
Till March 2020, he had no plans to sell the airline stocks. But in April, Berkshire sold its entire position in the four largest companies: American Airlines Group Inc, Delta Air Lines Inc, Southwest Airlines Co and United Airlines Holdings Inc. after these stocks plunged.
So, this is how coronavirus affected the value of airline stocks & Warren Buffett sold the entire stake.
There is another interesting concept called Buffett indicator which will help to understand the impact of coronavirus on the Indian stock market.
Buffett indicator for India
The Buffett Indicator is the total value of the stock market relative to the economy’s GDP. It is calculated by dividing the sum of the market capitalization of all the stocks in the country by the GDP of the country. It is used to get an idea of the valuation of the stock market whether it is undervalued or overvalued. The higher the value, the market is overvalued and vice versa.
But the Buffet indicator seems to show the wrong signals in the context of the Indian stock market.
The ratio of market capitalization to GDP for India has already breached the level of 56 and dropped to 52. A mark of 56 is the Global Financial Crisis level. It seems that there is a high level of uncertainty in the market. It is difficult to determine what the market capitalization is capturing after April’s 14% rally in the equity benchmarks. The lockdown had a negative impact on the economic output. However, the stock market is showing green signs. It seems that Nifty and Sensex are trading at expensive valuations.
So, there might be a further market correction. It is very uncertain to predict the stock movement right now. You should make investments after a detailed fundamental analysis of the stocks.
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