This has been an unprecedented year in many respects. We've witnessed a never-before-seen global response to the coronavirus disease 2019 (COVID-19) pandemic, observed record-breaking labor market disruption in the U.S., with 22 million Americans losing their jobs over a four-week stretch, and watched equities swan dive into the fastest bear market in history. In fact, it took just 33 calendar days for the benchmark S&P 500 to shed 34% of its value.
But America has seen worse.
"America's best days lie ahead"
Recently, I decided to take the time to reread Warren Buffett's letter to Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholders for 2008. I chose 2008 given that it was the height of the financial crisis and it represents the steepest recession the U.S. has experienced since the Great Depression. Said Buffett in Berkshire's shareholder letter:
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
Without fail, however, we've overcome them. In the face of those obstacles -- and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead.
Always the optimist, Warren Buffett recognizes that high-quality businesses with competitive advantages rise in value over time. By being greedy when others are fearful, the Oracle of Omaha has made some of his best long-term investments.
Four goals Warren Buffett focuses on every single year
Yet what really stands out about Berkshire Hathaway's shareholder letter during the financial crisis is the four goals Buffett and right-hand man Charlie Munger focus on every year, regardless of how well or poorly the U.S. economy or stock market are performing.
- Maintaining Berkshire's Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
- Widening the "moats" around our operating businesses that give them durable competitive advantages;
- Acquiring and developing new and varied streams of earnings;
- Expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.
Buffett and his team certainly have No. 1 well-covered at the moment. Berkshire Hathaway ended 2019 with a near-record $128 billion in cash on hand, with the company owning about 60 different businesses and having an investment stake in 52 different securities. Although the Oracle of Omaha has preferred Berkshire's cash position be closer to $30 billion than where it currently sits, he's also adamant that acquisitions be conducted at a sensible price, and that any future acquisitions move the needle and provide a tangible benefit to Berkshire's bottom line. The recent downward move in valuations might just coerce Buffett to make some big moves with the company's cash hoard.
As for goal No. 2, Buffett has always had a keen eye for locating companies with "moats," or competitive advantages that remain sustainable over the long run. A really good example is insurance giant GEICO, which Berkshire Hathaway fully acquired in 1996. Said Buffett about GEICO,
The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance so everybody's going to have one auto insurance policy per car, basically, or per driver. And I can't sell them 20, but they have to buy one. What are they going to buy it on? They're going to buy it based on service and cost. Most people will assume the service is fairly identical among companies, or close enough, so they're going to do it on cost, so I gotta be the low-cost producer. That's my moat.
Buffett has plenty of investments in his portfolio that also fill the bill as potentially "moat"-worthy, such as Apple, Amazon (NASDAQ:AMZN), and Costco Wholesale, to name a few.
With regard to goal No. 3, Buffett already has numerous earnings sources via his owned businesses and the aforementioned 52 held securities, which'll yield more than $4.7 billion in dividend income in 2020. However, he's also been innovative over the years in his approach to make a profit for Berkshire Hathaway and its shareholders.
For example, in 2011, Buffett struck a deal with a then-struggling Bank of America (NYSE:BAC) to purchase $5 billion worth of preferred shares. This preferred stock yielded 6% annually to Berkshire Hathaway, but more importantly it came with warrants to purchase up to 700 million shares of Bank of America stock at a fixed price of $7.14 at any point over the following 10 years. Bank of America had, at one point, soared to well over four times this fixed price, which made it a no-brainer for Buffett to swap out his preferred stock for 700 million common shares in 2017.
Lastly, Buffett and Munger have done an excellent job of allowing their investment team to expand their horizons. For instance, Wall Street was abuzz when it looked as if Buffett himself had purchased shares of e-commerce giant Amazon during the first quarter of 2019. We'd later learn that the Amazon share acquisition wasn't tied to the Oracle of Omaha but rather one of his investment team members. Buffett certainly has to be happy with the results, thus far, with Amazon hitting a fresh all-time high last week on what'll likely be strong e-commerce sales during the first quarter.
The point is that the stock market is wholly unpredictable in the short-term. But just because it's unpredictable from one day to the next, it doesn't mean you should abandon your long-term financial goals or investment thesis because of the occasional financial hiccup.