Worried about inflation? Here’s what Warren Buffett says Berkshire Hathaway is doing
Inflation is on the minds of investors, policymakers and ordinary Americans. You can feel it at the pump, at the grocery store, at the post office and even at the barber. Since inflation is higher than the rate of economic growth, real gross domestic product for the first quarter of 2022 fell 1.4% year over year. If we get another negative reading for the second quarter, the US economy will officially be in recession.
Warren Buffett and Charlie Munger talked about inflation at Berkshire Hathawayit is (BRK.A -2.94%) (BRK.B -2.55%) annual meeting of shareholders on Saturday. Here’s what they said and how they’re positioning Berkshire to weather the storm.
An inevitable consequence
Both Buffett and Munger spoke negatively about the state of the economy due to inflation and the fact that it is largely the result of loose fiscal and monetary policy. This policy artificially inflated demand and effectively caused an imbalance between supply and demand, the remedy for which was to raise prices to try to lower demand. And now the remedy seems to be to raise interest rates in an attempt to reduce demand. “We’re seeing a rage that we just sent a lot of money one way or another,” Buffett said.
However, Buffett and Munger view inflation as a necessary consequence to lift the United States out of what could have been a COVID-19-induced depression.
“We had a lot of inflation, and it was almost impossible not to have it if you were going to give the kind of money that we gave. And it’s probably a good thing that we did, in fact, I think at some point when the Federal Reserve was creating money, if it hadn’t, our lives would have been worse, much worse. That was a big decision,” said Buffett.
In another exchange, Munger said, “This time it’s happened on a scale we’ve never seen before. These checks are just being mailed out to anyone who claims to have a business and claims to have employees. They’ve probably been drowning the country in money. for a while, and like you [Buffett] say, they probably had to.”
“In my book, Jay Powell is a hero,” Buffett replied. “It’s very simple, he did what he had to do.”
Find value wherever it is available
One way to grow wealth in times of inflation is to seek out opportunities that would otherwise not be available. The trick is to have plenty of experience finding these opportunities in other economic conditions as well. “We depend on mispriced companies through mechanisms where we are not responsible for their mispricing,” Buffett said.
Buffett surprised investors by revealing a roughly 9.5% stake in ActivisionBlizzard. The stake is worth about $6.2 billion as of Friday’s close. Buffett owned about $1 billion in Activision before Microsoft announced that it would acquire it for $95 per share. Buffett then bolstered Berkshire’s position as a classic arbitrage opportunity assuming Microsoft was a reliable buyer and would close the deal. This arbitrage opportunity is considerable, given that Activision Blizzard stock is currently at $75.60 per share.
Buffet’s Activision Blizzard game is just an old-fashioned way to find value in a tough market. However, regular investors should probably avoid this type of investment, as the deal is not based on fundamentals and could fail. You don’t want to end up owning a business that you don’t understand and didn’t really want in the first place.
So what can you do?
Learn from Buffett’s actions
It’s fine to say that inflation is inevitable. But the real question many investors are probably asking is how to position their portfolios for prolonged inflation.
First, it’s important to remember that economic cycles are just normal in a long career as an investor. Whether inflation is the cause of a sale or not is secondary. The biggest benefit is that a bear market can create life-changing wealth for investors in companies with bright futures, positive cash flows and sustainable balance sheets.
What Berkshire is showing through its stocks is an increased buying appetite that we haven’t seen in years, indicating that Berkshire is finding value – primarily in the energy sector. In less than a year, oil and gas went from a minor allocation to a major allocation. from Berkshire Chevron holding pole vaulted to his third highest position, while western oil has been in the top 10 since Berkshire increased its stake in February and March. Berkshire also took a stake in HP this year, and its acquisition of the insurer Alleghenia shows its curvaceous classic value.
Chevron is known for its industry-leading balance sheet and low cost of production that allows it to break even free cash flow even when oil is in the $40s a barrel. Meanwhile, Occidental Petroleum is a much more aggressive spender and has a higher break-even point than Chevron. But its relatively high capital spending has paid off now that oil and gas prices have hit eight-year highs. Meanwhile, Berkshire’s other significant positions are in large diversified companies like Apple and Coca Colawhich is one of the most recession-proof and reliable sources of passive income on the market.
Exercise caution in a difficult market
Altogether, Buffett’s actions show that Berkshire is finding value in the market, more value than it has found in years. But this Berkshire isn’t just buying the downside of any company. It selectively buys companies that contribute to inflation (upstream producers like Occidental) or have relatively reliable cash flows and cheap valuations (like Chevron and HP).
For investors who aren’t managing billions of dollars in assets, sticking with unstoppable stocks that you’ll want in your corner if the market crashes can be a great way to rest the night and put on the gauntlet. of a bear market.