Maybe it’s just a trick of perspective, but Warren Buffett is looking rather dashing these days – or, at least, as dashing as any 88-year-old billionaire in a baggy suit can be expected to look.
It’s not that he has suddenly developed an interest in grooming, but that the other parts of this long-running bull market are showing their age, too. For anyone who harbours doubts about Wall Street’s current euphoria, Mr. Buffett offers an appealing alternative.
His company is flush with cash, ready to do deals and managed by smart people. Unlike the broad U.S. stock market, Berkshire does not depend on a handful of gigantic tech companies to propel its growth. If a downturn does come – and it always does – Mr. Buffett and Berkshire look like good candidates to prosper.
To be sure, the company has many critics. I know, because I was one for several years. So let me recite the usual complaints as we prepare for the Berkshire annual general meeting this Saturday.
The beefs start with two undeniable facts: Mr. Buffett is old and Berkshire is huge. No one knows how much longer the great man will be with us. What is certain is that a company of Berkshire’s monumental scale has limited avenues for meaningful growth. A billion-dollar gain or loss barely registers any more for a company with US$700-billion in assets.
For this, and other reasons, meaningful gains are becoming harder to achieve. Some of Mr. Buffett’s recent investments, such as his stakes in IBM and Kraft Heinz, have not panned out.
His well-known aversion to technology companies has also been a downer. During the past decade, as digital superstars such as Alphabet, Amazon and Facebook have soared higher and higher, Berkshire has lagged behind the S&P 500. It has gained 254 per cent since 2009, while the broad market has returned 313 per cent.
To make matters worse, Mr. Buffett has yet to name a successor and his company has sprawled in so many directions that it is nearly impossible to follow all its moving parts. For would-be investors, this raises an obvious question: Why not just buy an S&P 500 index fund instead?
The answer hinges on the possibility of a market meltdown in the years ahead. Say what you will about Mr. Buffett’s advanced years or Berkshire’s unwieldy size, but there is something undeniably comforting about a company with more than US$100-billion in cash and cash-like investments on its balance sheet.
At this point in its evolution, Berkshire is not so much a traditional investment vehicle as a payday-loan company for businesses facing emergency needs for cash. If markets do seize up, and enterprises need to raise funds quickly, Berkshire will have the opportunity to drive some attractive deals, just as it did during the most recent financial crisis, when it agreed to buy US$5-billion in preferred shares from Goldman Sachs at an unusually generous dividend yield of 10 per cent.
To be sure, there is no guarantee that any new crisis is on its way. Even if one does come, Berkshire will face competition for deals from well-heeled rivals, such as sovereign wealth funds, pension funds and private-equity outfits. But Berkshire’s unique ability is its capacity to move quickly, without the bureaucracy of many of its competitors.
It displayed that ability this past week when it agreed to fund Occidental Petroleum Corp. in its bid for Anadarko Petroleum Corp. Occidental is attempting to fend off Chevron Corp., which has made its own offer for Anadarko, and it was willing to pay a hefty price for Berkshire’s backing.
If Occidental’s bid proves successful, Berkshire has agreed to buy US$10-billion of Occidental preferred shares. Mr. Buffett’s company will earn an unusually lush 8-per-cent dividend yield on those preferreds. It will also gain warrants that would allow it purchase up to 80 million Occidental shares in a private offering at US$62.50 apiece. The deal appears to have remarkably little downside for Berkshire, but a lot of potential upside.
Similar opportunities are likely to emerge from time to time so long as Mr. Buffett is in charge. And when he leaves the scene? Berkshire shares will inevitably be hit hard. But there’s no reason to think they will stay down. Their value ultimately rests on the company’s dizzying ability to generate cash – which it does to the tune of US$100-million a day, with little direction from head office.
No matter who is in charge, Berkshire is unlikely to return to rapid growth given its huge size. But the big tech companies that have propelled Wall Street higher in recent years are also showing signs of slowing growth. While still expanding revenues at double-digit clips, Apple, Facebook, Alphabet and Amazon have all decelerated from their pace of a couple of a few years ago. Given their lofty valuations, it’s not clear how much value they represent.
In contrast, Berkshire looks reasonably valued, well diversified and largely impervious to changes in technology or regulation. Like an old man in a ill-fitting suit, it won’t bowl you over at first glance. But look more closely and you’ll see a lot to like.