In times like these, with the markets swinging wildly and lower, it's tempting to bet against large companies with broad exposure to the economy at home and abroad. Collapsing oil prices are having a trickle-down effect through the energy sector and into finance, transportation, and other sectors. The Chinese economy is on the ropes, sending markets all over the world into chaos.
It's only logical that large companies like Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) would bear the brunt of these large, macro changes. The stock is, after all, down about 10% during the past three months amid all the market turmoil.
You may even consider shorting the stock, but I wouldn't. Not because these concerns aren't valid, but because the upside is just so much greater. Let me explain.
Buffett doesn't pay attention to markets day to day, and that's great for a time like this
Berkshire CEO Warren Buffett once said that "Only when you combine sound intellect with emotional discipline do you get rational behavior."
A lot of what's happening in the markets recently is being driven by emotion, and in times like these, it'd be a mistake to bet against an investor with his level of market poise.
To Buffett, chaotic, large market movements like we've seen this month are opportunities to buy the companies he likes for a cheap price. It's fundamentals over emotions. It's about understanding a company's intrinsic value and price, not wild market gyrations from day to day..
While the rest of the world panics, Buffett and Berkshire just keep on doing what they always do. The only difference is that the prices they pay will most likely be cheaper.
A strong portfolio of companies
Berkshire Hathaway wholly owns a huge variety of companies from railroads to insurance companies to jewelry stores. The company also has significant minority ownership in a massive portfolio of equities that include banks, beverage companies, and retailers. There isn't a corner of the U.S. economy where Berkshire doesn't have at least a little exposure. In light of the concerns in the market today, this expansive portfolio does present some risks for the company.
Will Berkshire's railroad business suffer from the oil and gas industry's issues? Yes, to some extent, it probably will. Could the Chinese issues trickle through to the international companies Berkshire owns in its equities portfolio? Of course. Could the banks on Berkshire's books have problems with rising loan delinquencies if the economy takes a dip? They absolutely could.
But do these challenges mean the end of Berkshire's successful run over the last 40 years? That's a much different question altogether. I think the company's prior performance indicates an ability to survive and thrive in a wide variety of economic scenarios, the present one included. In a few years, after the dust of the current uncertainty has settled, Berkshire could feasibly own several more companies, and each would most likely come at a much cheaper cost.
Berkshire has so much dry powder
When the stock market declines, Buffett and Berkshire usually make a ton of money. In 2008, at the nadir of the financial crisis, Buffett invested $5 billion in Goldman Sachs. Three billion dollars went to General Electric a month later.
In August of 2011, Buffett invested in Bank of America. The markets were in a full-on panic over B of A's mortgage loan problems. Meanwhile, Buffett calmly stroked a check for $5 billion. In all, Berkshire invested more than $25 billion in deals during the crisis.
By 2013, those investments had already returned $10 billion to Berkshire. The returns are stunning, but they're only possible because Berkshire had the ability to write $25 billion of checks to actually make the investments.
This time around, the company has even more cash at the ready. As of June 30, Berkshire reported cash and equivalents of $66 billion, with free cash flow of $4.6 billion for the quarter. That is just an absurd amount of money, and it sits at the willing and capable hands of perhaps the greatest opportunist of all time, Warren Buffett.
A bet I'm not willing to make.
Shorting Berkshire today loses sight of the opportunity that today's turmoil presents. Berkshire's potential downside from a slowdown in its railroad business, or softening consumer demand, is more than compensated for by the massive upside of Warren Buffett, cheap prices, and about $50 billion to work with.
You can short Berkshire Hathaway if you want to, but that's a bet that I'm simply not willing to make.