During the COVID-19 downturn, investors might have expected Warren Buffett's conglomerate Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) to put its massive $125 billion cash pile to work and scoop up bargains by the truckload.
However, according to Buffett partner Charlie Munger, who recently spoke with Jason Zweig at The Wall Street Journal, that hasn't been happening.
It's surprising that the man who coined the term, "be greedy when others are fearful," and who bought lots and lots of stocks during the 2008–2009 Great Recession, is now sitting on his hands as the market roils from the COVID-19 slowdown.
So, why might Berkshire be slow to deploy capital, and should this make you worried of a "double-dip" market downturn?
No one is coming to Buffett yet
One of the reasons Buffett was able to deploy so much capital in the last downturn was that financial firms actually came to him when they needed cash. According to Munger, that isn't happening this time: "Everybody's just frozen," Munger said. "And the phone is not ringing off the hook. Everybody's just frozen in the position they're in."
Apparently, this interruption has been so quick and severe that companies are still trying to figure out their needs for the current quarter and year. And with the passage of the $2.3 trillion CARES Act stimulus package, many beleaguered companies are calling Washington first to see if they can get forgivable loans under the bailout before seeking a potentially expensive bailout from Berkshire.
Many stocks have quickly bounced back
Another reason Berkshire may have been slow to buy is that the market has bounced back in a big way since hitting the March 22 lows. In fact, the S&P 500 is already more than 50% of the way back to all-time highs set in early February. This has been a result of the CARES Act, unprecedented actions from the Federal Reserve, and some positive data on COVID-19 treatments.
Apparently, that move may have been too quick for Buffett to deploy capital into cheap-enough securities. Certainly, the market has been very quick to look through the current crisis, and maybe too quick for Buffett and Munger's tastes.
This downturn is different
The reluctance to dive in could be somewhat explained by Munger's take that the current downturn really is unlike anything he and Buffett have ever seen, despite Buffett being 89 and Munger 96 years old! Munger told the Journal: "This thing is different. Everybody talks as if they know what's going to happen, and nobody knows what's going to happen."
While Munger acknowledges we are definitely in a recession, he also doesn't foresee a lasting depression, because the government and Federal Reserve have stepped in in such a big way to put a floor under the credit markets. Still, he's unsure how long the recession will last.
In the last downturn, from 2008 to 2009, there was a high degree of uncertainty, but the downturn was the unwinding of a financial bubble, the effects of which Buffett and Munger could probably calculate to some degree. However, with a viral pandemic lasting for an uncertain amount of time, a vaccine timeline still up in the air, and gradual reopening guidelines for the economy still murky, it's difficult to assess how the economy will behave, and thus how stocks should be priced.
Berkshire is conservative
That has made even seemingly bargain-priced stocks difficult to analyze. Buffett and Munger like to deploy large amounts of capital into "no-brainer" opportunities, and very few stocks are "no-brainers" today.
"Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it," Munger said. "We're always going to be on the safe side. ... But basically we will be fairly conservative. And we'll emerge on the other side very strong."
Thus, with a lot of unknowns, and many high-quality stocks having bounced back to fair value -- or better -- Berkshire is taking a wait-and-see approach.
But don't count anything out
Munger didn't say that Berkshire wouldn't do anything big. After all, he did add that despite his and Buffett's conservatism, "That doesn't mean we couldn't do something pretty aggressive or seize some opportunity."
With the recent bounce in the market, some analysts have been calling for an eventual retest of the March 22 lows below $2,200 on the S&P 500. If that happens, and a high-quality business that Buffett and Munger understand gets very, very cheap once again, Berkshire could still make a large, consequential purchase this year.
However, there will likely need to be more clarity on how the virus is affecting the economy before that happens. Buffett and Munger's expertise lies in consumer brands, financial stocks, and industrial and transportation companies. Financial and industrial stocks look like they are going to be in for a rough ride in the intermediate future, so it's not surprising to see Berkshire holding back on those investments now. Consumer staples companies might be good candidates, but many of those stocks haven't corrected by very much.
Now may be a good time for Buffett and Munger to venture into more technology stocks than they have in the past. While Buffett has historically shied away from tech, Berkshire did buy Apple (NASDAQ:AAPL) in 2016. And while tech stocks have traditionally been cyclical, many of today's tech giants are powering through the COVID-19 downturn, with some even benefiting from remote-work, education, and telemedicine trends.
If there were ever a time for Berkshire to venture more into technology, that time might be now.