Every year folks anxiously line up outside the arena in Omaha, waiting to hear Warren Buffett and Charlie Munger deliver their opinions on all things.
Like most other things this year, there was a change, and we were watching Mr. Buffett and Vice Chairman Greg Abel sit in a 18,000 seat arena pretty much by themselves.
It was surreal to see, but out of the meeting came a couple of good takeaways that are applicable to everyone’s day to day life:
1) Cash is still king. Despite a lot of raised eyebrows across the financial world, Berkshire increased their cash reserve to $137 billion dollars. When asked why, Mr. Buffett provided two answers:
– First, they were unable to secure any deals that were attractive to them (think back to 2008 and the Goldman deal). The federal reserve intervention in the fixed income markets dried up any opportunity for such a deal, so he wasn’t willing to take the risk without the reward.
– Second, they never want to have to depend on the fixed income markets in the event there is an issue. They would prefer to be liquid enough to solve their own problem and not have to necessarily seek to borrow money.
2) Dynamism. Several years ago, I remember Mr. Buffett saying something along the lines of: ‘Anyone who buys an airline should get their head checked…’. Then in 2016, he bought shares in four of the major airlines, surprising a lot of people. Especially me. I had long heard rumblings of a possible investment into Southwest, but all 4, wow?! Flip the calendar to 2020, Coronavirus brings the nation to a standstill, and he exits stage left. Why? Because overnight, the entire industry changed, and airlines have now had to take on a lot of debt to stay afloat. Simply put, he believes the headwinds are too great for the foreseeable future, and so he reversed course on his purchase made just last year.
3) Framing. During Mr. Buffett’s opening remarks, he gave folks a history lesson about wealth in our country. However when he began discussing the Great Depression and 1929 he said a line that stuck with me: ‘So the great depression went on, and it lasted a very long time, but it lasted a lot longer in the minds of people than it did actually in its effects.’. As he further elaborated, that fear paralyzed the markets for a long time.
So, what can we do with these and how can we apply them?
- Build up that ‘war chest’ to 6 months of expenses if you do not have one already.
- Be flexible. Investment ideas and themes today can change overnight.
- Focus on gratitude. Everyone focuses on the stock market crash of 1929, but they often don’t discuss how out of those tough times came programs like the FDIC. Think about how those programs have provided us with peace of mind today.