What Could Warren Do?

In a time of market turmoil, a few words from Warren Buffett can make a big difference. 

During the darkest days of the financial crisis in October 2008 as the market steadily slid, Buffett wrote an op-ed article that proclaimed that he was buying U.S. stocks and asserted that “over the long term, the stock market news will be good.”  We could certainly use such confidence now given how this week has been going.

Alas, we probably will not get anything quite like that on Saturday morning, when the Berkshire Hathaway CEO’s annual letter to shareholders is released along with the conglomerate’s fourth-quarter earnings.  

When it comes to stocks, Buffett has become extremely cautious, to a surprising degree for the world’s most famous investor.  In this past weekend’s Barron’s, my colleague Andrew Bary noted that in the pandemic selloff in March 2020,  Buffett “ignored his own maxim to  “be fearful when others are greedy and to be greedy only when others are fearful.” 

Andrew added: 

Since March 2020, Berkshire has been a net seller of stocks, including a badly timed near-complete liquidation of an 8% holding in Wells Fargo at what we estimate was half of Wells Fargo’s current price of $56—leaving $10 billion on the table. The only major purchase, an $8 billion buy of Verizon Communications, is down 10% from Berkshire’s cost.

So what stocks should Buffett buy?  I asked Andrew for his thoughts today  and his answer was emphatic: housing.  Berkshire, he points out, already owns Benjamin Moore paints, Shaw Industries flooring, and Clayton Homes, among other real estate businesses.  Buffett “knows the housing market very well,” Andrew said. And many of the stocks have been hit hard lately. 

Possible candidates could include one of the big publicly traded home builders, like Lennar, or an appliance maker, like Whirlpool.  The big home-improvement chains Home Depot and Lowe’s could also be of interest, although their stocks have performed well over the past 12 months. 

On Saturday, much of the initial focus on Buffett’s letter will be on whether he says anything about succession plans or changes for Berkshire when he is no longer CEO, given that he will be turning 92 in August.

The other area of interest will be signs of how active Berkshire has been buying back stock. The conglomerate has repurchased nearly $40 billion of its shares since the middle of 2020. 

If there are indications that buyback activity slowed in the fourth and current quarters,  that “would signal that Buffett thinks the stock is no longer so cheap,” Andrew wrote. 

Read more about what to expect Saturday here and here.