Outside the Box: How Warren Buffett is handling the coronavirus crisis like he mastered the Great Recession
As the coronavirus crisis unfolds, many are asking: Where is Warren Buffett? They want to hear and see more from America’s most literary and famed investor, noted for both calm and prowess in times of distress. People know the current crisis is more acute than any in living memory, including the 2008-09 financial crisis, and would welcome more clarity from the “Oracle of Omaha.”
We don’t have to wait long: On Saturday, May 2, Buffett will host the annual meeting of his company, Berkshire Hathaway
fielding questions from journalists and shareholders. Notably, Buffett’s longtime business partner, 96-year-old Charlie Munger Berkshire’s vice-chairman, will not be on the livestreamed call.
As the longtime author of The Essays of Warren Buffett and numerous books about Buffett and Berkshire, I can provide some context about how Buffett is responding to the challenges both the U.S. and global economy face as a result of the COVID-19 pandemic.
For starters, those who interpret Buffett’s perceived silence as an ominous sign should consider a few points. First, Buffett has been as vocal during this crisis as he has been in others — and his tune has not changed. For instance, on February 24,, as the pandemic gathered lethal force, Buffett sat for an interview with Becky Quick of CNBC. He called the pandemic “scary stuff,” but said it does not alter his long-term outlook or approach — disciplined fundamental business analysis remains vital.
On March 10, as the global economy began to shut down, Buffett was interviewed by Andy Serwer on Yahoo! Finance. He called the pandemic a “punch” for markets — made worse by related economic shocks, especially international intransigence on cutting oil production amid a glut. Buffett drew comparisons to the U.S. stock market crash on October 19, 1987 and the credit market panic of September 15, 2008 — from both of which the world eventually recovered.
Buffett has been just as vocal nowadays as he was during the 2008-09 financial crisis. On October 1, 2008, he sat for an interview with Charlie Rose and another with CNBC on March 10, 2009. In the first of those, Buffett said he had never before seen people more “fearful, economically;” that “the economy is going to be getting worse for a while;” and that frozen credit markets were “sucking blood” from the U.S. economy. Things were no better six months later, when Buffett said the economy had “fallen off a cliff” and a turnaround would take time — but that five years later normalcy would return.
Looking for reassurance
In the current crisis, many yearn for the soothing reassurance from Buffett they recall reading early in the last one. On October 17, 2008, Buffett penned an op-ed in The New York Times, a cheerleading piece for the national economy entitled “Buy American. I Am.” But as that crisis stretched out many months, in his March 10, 2009 interview Buffett regretted his timing, saying he “wished he had written” that New York Times piece later than he did. In this current crisis, just as in 2008-09, it is not only impossible to predict daily market volatility, it is impossible to predict how long it will last.
As for the lack of headlines nowadays concerning Buffett’s investment activity, concerned observers recall how Berkshire made numerous opportunistic investments early in the 2008-09 crisis. These included significant investments in Goldman Sachs in September 2008 and General Electric in October 2008, as well as smaller sums throughout the rest of 2008 in companies such as Harley-Davidson, Tiffany & Co., and USG. Importantly, in all of these cases the companies approached Buffett, knowing his longstanding practice of waiting to receive offers from sellers, not proactively seeking them out.
In the current crisis, despite Berkshire commanding ample capital — almost $130 billion in cash — sellers do not appear to be lining up just yet. Indeed, in an April 18 interview with the Wall Street Journal, Munger said “The phone is not ringing off the hook. [Companies are currently] all negotiating with the government, but they’re not calling Warren.” You can be sure that, once companies seeking capital turn to the private sector, Buffett’s phone will ring.
Berkshire is just as frozen as every other company in a paralyzed global economy.
Even if opportunities arise amid today’s pandemic, liquidity and survival remain paramount to Buffett. Munger likened Buffett’s spot to a ship’s captain facing an overwhelming typhoon — the goal is simply to survive the disaster with the ship intact. Berkshire’s survival includes maintaining abundant liquidity, meaning Buffett will not allocate all capital to acquisitions or other investments. That is why Berkshire is also actively adding to its already-large cash position: in early April issuing $1.8 billion of yen-denominated bonds and, following an issuance of a €1 billion European debt offering in February.
One unique difference between the crisis now and in 2008-09: Berkshire is just as frozen as every other company in a paralyzed global economy. As Buffett explained on CNBC recently, the construction industry has been stalled — hurting the carpeting business at Berkshire’s Shaw Industries unit and insulation sales at Johns Manville — and retail has been largely closed, hitting Berkshire’s businesses from Dairy Queen to See’s Candies. Yet again stressing the long-term over the short term, Buffett said: “There’s always trouble coming. The real question is where are those businesses going to be in five or 10 years.”
Calm in the storm
Despite the greater acuteness of today’s crisis, Buffett does not appear to be rattled by it. Perhaps this is because, catastrophic and unprecedented as the medical and economic havoc may be, such catastrophe did not come as a complete surprise to him. Consider his prescience just last year in his 2019 letter to Berkshire shareholders:
“A major catastrophe that will dwarf hurricanes Katrina and Michael will occur — perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as wind or earthquake, or it may be a total surprise involving, say, a cyberattack having disastrous consequences beyond anything insurers now contemplate.”
People have long dubbed Buffett the “Oracle of Omaha,” a moniker that still fits. The upshot for Berkshire may remain the same too, as he continued his 2019 message:
“When such a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big — very big. Unlike many other insurers, however, handling the loss will not come close to straining our resources, and we will be eager to add to our business the next day.”
Buffett will have a lot to say at what should prove to be a consequential Berkshire annual meeting. This year, more than 1 million people are expected to listen remotely on Yahoo! Finance. The meeting’s central feature will be similar, featuring Buffett answering questions, though it will be shorter and the co-star will not be Munger but Berkshire’s younger vice-chairman, Greg Abel. In the past, throngs of shareholders also gathered in separate lectures, meetings, and seminars led by authors and other experts on all aspects of Berkshire life. Many of those will be replicated online this year as well. (Including a webinar that I will host on the afternoon of Friday, May 1.)
Meanwhile, we would all do well to remember this insight from Buffett’s 2018 letter: “Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.”
From Warren’s pen to God’s ears.
Lawrence Cunningham is a professor at George Washington University. He is the author of many investing books including The Essays of Warren Buffett: Lessons for Corporate America (Carolina Academic Press; 5th ed. 2019); Margin of Trust: The Berkshire Business Model (Columbia Business School Publishing; 2020) (mentioned by Buffett in this year’s shareholders’ letter); and Dear Shareholder: The Best Executive Letters from Warren Buffett, Prem Watsa and Other Great CEOs (Harriman House; 2020).