Berkshire posts a loss of $50 billion due to COVID-19
Chart Source: Bloomberg
The pandemic, the lockdowns and the slowdown in economic activity had an impact on Berkshire’s quarterly profits too. However, it needs to be remembered that Berkshire always followed the policy of writing off all MTM losses each quarter, which has led to huge swings in net profits. For the March 2020 quarter, Berkshire reported higher operating profits of $5.90 billion but took a write-off of $54.50 billion on depletion of financials and airline stocks. This resulted in a net loss of $49.60 billion in the March quarter. Buffett has normally focused more on the operating profits as a reliable metrics but the net profit does give a more realistic picture of the $250 billion equity portfolio of Berkshire.
Sitting tight with $137 billion in cash
Over the last few AGMs, investors have been constantly querying Buffett about how they plan to use the cash in the balance sheet. The cash is a massive $137 billion, equivalent to the GDP of many smaller nations. Over the last few years, Buffett has continued to remain on the sidelines even as the cash has piled up. Even after the COVID-19 correction, Buffett still prefers to park his money in US Treasuries instead of venturing into buying stocks. Berkshire has sold additional shares worth $6 billion in April so the cash pile would have built up further after March. Buffett has continued to hold on to his argument that valuations are sky-high and do not warrant fresh equity investments.
Buffett logs out of airline stocks
|COVID-19: How Berkshire’s Top-5 holdings performed?|
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With the Top-5 stocks in the Berkshire portfolio doing badly, Buffett had little choice but to log out of airlines. Aviation was one of the worst hit by the pandemic. Buffett had added close to a 10% stake in four airlines viz. United Airlines, Delta, Southwest Airlines and American Airlines. As Buffett put it, “The airline industry had changed immutably in the US and across the world”. Buffett admitted at the AGM that Berkshire had exited its stakes in the above four airline stocks. With the COVID-19 putting severe restrictions on air travel and thousands of aircraft grounded at the tarmac, Buffett feels it could be a very long time before airlines could return to operational viability. Clearly, the optimism over airline stocks is gone for good. Interestingly, the proceeds from the above sale were put in US Treasuries.
Warren Buffett continues to bet on America
Probably, the biggest statement of conviction about the United States came from Warren Buffett. He underlined that it would be naive to believe that any other nation could take the place of the US that easily. He reminded his investors that the US had been written off after the sub-prime crisis but in the last 12 years it had emerged as the strongest and the most resilient economy. Clearly, Buffett does not plan to look much beyond the United States in terms of Berkshire’s investment universe. At least; not for the time being! Buffett also underscored that America had survived the Great Depression, two World Wars, the oil embargo, 9/11 attacks and a lot more. He expressed confidence that the US would come out of the COVID-19 pandemic also unscathed and actually more robust.
What about handing over the mantle?
The first signal of handing over the mantle was given out when Indian born Ajit Jain and Canadian businessman Greg Abel were elevated to the board in 2018. Even Buffett admitted that it was time to hand over. Buffett is 90 and his partner Charlie Munger is 96. Clearly, neither of them is young by any yardstick. Among the potential successors, Abel is 58 and Jain is 69, clearly giving a big edge to Abel in terms of ensuring continuity. At the 2020 AGM, Buffett gave the first signal of regime change with Greg Abel taking investor questions along with Buffett. Neither Jain nor Munger were present at the AGM. Apart from age, a clean track record and his critical leadership of the non-insurance business have worked in favour of Abel. Of course, the markets will be keen to hear an official announcement but AGM 2020 has perhaps settled the succession issue in no uncertain terms!