My key takeaway from Berkshire’s AGM 2020

My key takeaway from Berkshire’s AGM 2020

Warren Buffett started the Annual General Meeting (AGM) with a seemingly bullish stance, diving into America’s history and how it always emerged stronger. Despite painting a rosy image, it is important to observe his actions. Key decisions such as the sale of airline stocks, the lack of new investments and share repurchases indicated a much more bearish sentiment.

But in any event, the range of probabilities on health narrowed down somewhat, I would say the range, the probabilities, or possibilities, and on the economic side are still extraordinarily wide. We do not know exactly what happens when you voluntarily shut down a substantial portion of your society.

Warren E. Buffett

As the meeting unfolded, we were once again reminded of the Oracle’s ability to think in probabilities and the importance of taking action when circumstances change.

The ability to change your mind

When the facts change, I change my mind. What do you do, Sir?

John Maynard Keynes

Selling off the entire position in airlines

In late 2016, Buffett revealed a surprise bet on the airline industry and took stakes in four major airlines – American Airlines, United Continental Holdings, Delta Airlines, and Southwest Airlines. In 2020, the stocks were down 63%, 70%, 59%, and 46% respectively.

Sale of Airline Shares

His decision to sell highlights his ability to change his mind when new facts present itself and not let ego stand in the way. This was my biggest takeaway as its a tough pill to swallow when my investment thesis doesn’t pan out the way I expected it to.

In Buffett’s own words “The airline business, and I may be wrong and I hope I’m wrong, but I think it changed in a very major way.” Similar to Singapore Airlines, these four airlines were each going to borrow an average of at least $10 to $12 billion each.

These debt obligations will severely impact shareholders’ returns over a prolonged period. And there was the possibility of the airlines having to issue shares at a cheap valuation to raise capital.

Furthermore, the demand for travelling remains uncertain 2 to 3 years from now. Passenger miles may not return to 2019 levels and airlines will not be profitable if passenger load falls below 70-80%. Buffett was concerned about the oversupply of aeroplanes as a result of COVID-19.

There could be many reasons he felt that there’s potentially a structural shift happening. My guess is that business travel which accounts for the highest margins (i.e. first class and business class passengers) would significantly reduce as companies undergo rapid digitalization during this period. Meetings and deals could be executed online as opposed to having an executive flying several hours and spending a day or two away from home.

Lack of share repurchases

In 2019, Berkshire repurchased approximately $5 billion worth of shares during 2019. From their annual report, we could see that the company repurchase class B shares between $204.07 to $221.67 range.

Excerpt taken from 2019 Annual Report

When the class B shares plunged to $162 per share, many investors including myself expected Buffett to massively repurchase shares as it was significantly below what he would consider to be undervalued back in 2019.

I was surprised when the total shares repurchased was only $1.7 billion in the first quarter of 2020. With Buffett ceasing shares repurchase in its entirety as the market went on a free fall.

Excerpt taken from Q1’2020 10Q

Once again, Buffett showed that when facts change, we have to adjust accordingly and not be anchored by our previous purchase price/ experience. He explained that Berkshire shares are not worth as much and it is not as compelling now to repurchase shares. Buffett was also honest and upfront that partly it was due to his mistake in purchasing the airlines.

He would much prefer to preserve the option value of money and share repurchases must only be done when current share prices are at a significant discount to intrinsic value to benefit existing shareholders.

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