The Omaha Report

When I last wrote about The American Tailwind, a section from Warren Buffett’s letter to Berkshire Hathaway shareholders last year, I shared an experience I had in Charlottesville, Va., at a college basketball game there. I could feel the American Tailwind, the force Buffett described that powered this country’s success, blowing through the building. The tailwind is difficult to describe, but I suppose it is at least one part determination, one part humility, two parts industry, and a whiff of pride.

A little more than a year later, instead of traveling to Omaha, Neb., for the Berkshire shareholder meeting, I found myself watching Warren Buffett via webcast as he sat nearly alone at a table on the darkened floor of the CHI Health Center. The first thing Buffett said was that the last time he was in that arena was for a college basketball game between Creighton and Villanova. Nobody in that arena, he said could have imagined that there would be no NCAA basketball tournament. Such a ‘flip of the switch’ in the national psyche would have been unimaginable.

I have seen a few snippets posted here and there since the weekend about Buffett being bearish and that Berkshire’s failure to make any splashy purchases during the first quarter, including its own shares, suggested there was more major pain ahead in the markets. However, in listening to the entirety of his comments in his prepared remarks and during the lengthy Q&A session that followed, I am here to report I did not hear bearishness. I heard a realist, but one whose long-term views on America and American capitalism were unchanged. Frankly, the more I think about it, I did not hear a single material change in his outlook regarding the long-term success of our country and the economic system that drives it. His view continues to be that over the long term, investing in the stocks of American businesses is still one of the best ways to build wealth over time in existence today. This strategy should be followed in the context of individual circumstances; if one lacks the financial or psychological wherewithal to remain invested amid drawdowns of more than 50 percent, then it is not the right strategy for that individual.

The great irony of tuning into the Oracle of Omaha is that he almost never discusses a single individual stock and that he professes year after year to not have any idea what the market is going to do in the near term, and yet millions of people, year after year, myself included, wait with bated breath on his every word about clues about what he thinks about the market and other current events. Indeed, this year is no different. In fact, given what’s happened in markets recently, his words along with his actions—and inactions—were of particular interest.

What follows is a summary of my notes on Buffett’s remarks on a range of subjects, sometimes accompanied by my puny observations about his observations:

The health situation and the economic situation are bouncing off each other as we go along. The range of possibilities has narrowed down. Not best case or worst case.

“We know what we don’t know but some very smart people are working on it and were learning as we go along.”

“It is not as lethal as it might have been.”

Spanish flu in 1918; mortality rate based off of the Omaha experience was 0.5 percent. Would translate into 1.7 million Americans today.

Still, “it’s very, very transmissible.”

“We don’t know the denominator because we don’t know how many have had it.”

“The range of possibilities on the economic side is still extraordinarily wide.”

“We do not know what exactly what happens when you voluntarily shut down a substantial portion of your society.”

Seems likely it will diminish in the summer months and then come back to a degree in the fall.

“I would not go around criticizing people at all for what they’ve done or anything of the sort. I just think you’re dealing w a huge unknown.”

“In’08 and ‘09 our economic train went off the tracks. This time we just pulled the train off the tracks and put it on the siding. I don’t really know of any parallel.”

“This is quite an experiment.”

“I remain convinced that nothing can basically stop America.”

“We have faced great problems in the past, we have faced tougher problems. And the American miracle, the American magic has always prevailed and it will do so again.”

“If you were to pick one time and place to be born… you would not pick 1720 or 1820 or 1920, you’d pick today.”

People have wanted to come here for 231 years. There’s always been people who wanted to come here.

“We are a very young country but what we have accomplished is miraculous.”

In 1790, the population of the U.S. was about 3.9m people, 700,000 of whom were slaves. This represented about one half of one percent of the population of the planet. They could have been drinking heavily and “even had a little pot in them” and they could never have imagined what the country would achieve in 231 years, a nation of $100 trillion in household wealth.

Buffett said he estimated that the rate of return off the Louisiana Purchase, which transacted at 3 cents an acre, the going rate in the market at the time, was about 5000 to 1 after adjusting for inflation.

This was not done without some serious bumps in the road; has not been 231 years of steady progress.

After just 72 years, we had Abraham Lincoln giving the Gettysburg Address, openly wondering if this nation, or any nation, dedicated to the proposition that all men are created equal, could long endure. The war killed 6 percent of males between the ages of 18 and 60. Today that number would be about 4 million people.

In 1929, the Dow fell 48 percent between September 3 and November 13.

Things didn’t seem like a depression at first. After Buffett’s birth, the market went down 83 percent in two years.

FDIC started 1934. If they had had it, it would be been a much, much different experience. Four thousand banks failed. Had an incredible impact on the psyche. It would have been a somewhat different world if the bank failures hadn’t rolled across this country.

FDIC has not cost the American taxpayer one dime. Mutual insurance company backed by federal government but paid in premiums. Now $100 billion.

“The Depression lasted a lot longer in the minds of people than it actually did.”

We adopted Keynesianism for World War II.

But the minds were so scarred. 1929 became a symbol in people’s minds like 1776 or 1492. Affected stock prices in a rather remarkable way.

The date was 1/4/51 before market climbed back to where it was before the Great Crash.

The index has returned 100 to 1 since Buffett got out of college in 1951.

In 1951, there was a huge worry that this was 1929 all over again. Such was the level of worry that the Senate Banking Committee conducted a special investigation of the financial markets. Among those involved in the investigation were Sen. Prescott Bush and Benjamin Graham himself, who testified that the market “looks high, and is high, but it’s not as high as it looks.”

“People lost faith for awhile. But nothing can stop America when you get right down to it. It’s been true all along.”

“In the end, the answer is never bet against America. That, in my view, is as true today as it was in 1789.”

“I would make the case that we are now a better country… we have made progress, we are a better society.”

“I know America is going to move forward over time but anything can happen in terms of markets. You can bet on America but you’re going to have to be careful about how you bet.”

“You know that America’s tailwind is not exhausted.”

“Equities are going to outperform, they are an enormously sound investment as long as they are an investment and not a gambling device.”

“People bring the attitude that because (stocks) are liquid and quoted minute by minute, that it’s important that you have to have an opinion on them minute by minute.”

All you have to do is remember that market is there to serve you and not to instruct you.

“If you owned the business you liked prior to the virus arriving, it changes prices but nobody’s forcing you to sell, and if you really like the business and you like the management you’re in with and the business hasn’t fundamentally changed, the stocks have an enormous advantage.”

“The American tailwind is marvelous.”

“I will tell you if you bet on America and sustain that position for decades, you’re going to do better in my view far better than owning treasuries.”

“I will bet on America the rest of my life and I hope my successors do it.”

“I hope I’ve convinced you to bet on America.”

“I don’t know the consequences of shutting down the American economy.”

“I’m not recommending that people buy stocks today or tomorrow or next week or next month; it all depends on your circumstances, but you shouldn’t buy stocks unless you expect in my view to hold them for a very extended period and you are prepared financially and psychologically to and hold them the same way you would hold a farm and never look at a quote. You don’t need to pay attention to them.”

“You’re not going to pick the bottom and nobody else can pick it for you or anything of the sort. “

“You’ve got to be prepared when you buy a stock to have it go down 50 percent or more and you’ve got to be comfortable with it.”

“There have been three times in Berkshire’s history when the price has gone down 50 percent. If you owned it on borrowed money you could have been cleaned out and there wasn’t anything wrong w Berkshire.”

“Frankly, some people are more subject to fear than others. It’s like the virus; it strikes some people with greater ferocity than others.”

In February, commercial paper borrowers went into their bank lines and scared those providers.

“Fear is the most contagious disease you can imagine. It makes the virus looks like a piker.”

“That changed dramatically when the Fed acted.”

The Fed acted with unprecedented speed and determination. March was the largest month for corporate debt issuance in history. Then April was bigger. They all ought to send a thank you letter to the Fed.

The Fed in mid-March did a Mario Draghi-style “whatever it takes” squared.

Berkshire operates under the assumption that the Fed will not do what they did.

In the first quarter, Berkshire bought back $1.7 billion in BRK shares. Why not more? Because the facts had changed and even though BRK was trading below where the company had done buybacks recently, the value in real time was not as attractive, meaning the margin of safety was not as high.

“We haven’t seen anything attractive.”

“The Fed Reserve did the right thing very promptly and I salute them for it, but that means that a lot of companies that needed money… got the chance to finance in huge ways in the last five weeks or thereabouts.”

“When change happens in the world, you adjust to it.”

Berkshire completely sold out of its positions in airlines. They had paid between $7 billion and $8 billion to own ten percent of the four largest airlines and they were getting about $1 billion in earnings. However, Buffett believes that the business has changed in a “very major way.” The four companies are each going to borrow at least $10 billion to $12 billion. The airlines business has the problem that if air traffic recovers 75 or 80 percent, “the aircraft don’t disappear.”

“We know what happens in airlines pricing when load factors go down and there’s an oversupply of airline seats.”

“We don’t trim positions. When we change our mind, we don’t take half measures.”

“The position isn’t that huge when I look at worst case possibilities, even if highly improbable.”

“We prepare ourselves for problems that create their own momentum. There are things that trip other things.”

BRK is about as sound as can be but Buffett would not bet his life that it would outperform over next ten years.

Caring does not guarantee results but it does guarantee attention.

“It’s hard to imagine getting a terrible result with Berkshire.”

Highest book value in the United States, perhaps the world, at $370 billion.

“That makes life difficult in some ways.”

Buffett says he has been wrong that inflation hasn’t come in the last ten years. Believes treasuries are a terrible investment over time.

“If you can have negative interest rates and pour out money and incur more and more debt relative to productive capacity, you’d think the world would have discovered it in the first couple thousand years rather than just coming on it now.”

The market system works wonders and it’s also brutal if it’s left entirely to itself.

The market system is marvelous in many respects but it needs government.

“It is creative destruction. But for the ones who are destroyed it can be a very brutal game.”

I do not want to come up with anything different but I certainly do not want unfettered capitalism.

“We don’t want to discourage people from working hard but that alone doesn’t do it. There is lot of randomness in the capitalist system. I think we can keep the best parts of our market system and capitalism and we can do a better job of making sure that everybody participates in the prosperity that that produces.”

“We may get some unpleasant surprises. I definitely come to the conclusion after weighing all that sort of stuff: Never bet against America.”

Any opinions are those of Burke Koonce and not necessarily those of RJA or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.