The long bull run in the markets has left Warren Buffett and Berkshire Hathaway searching far and wide for good deals —and not finding many.
Not surprising, says Geoff Scott, institutional portfolio manager at Cambridge Global Asset Management, who says that today’s high valuations and expensive companies mean that Buffett and his famous opportunistic investing philosophy may have to wait for the next downturn in the economy.
It’s hard to argue with success like Buffett’s, which has only amounted to a compounded annual return of 20.9 per cent over the last 40 years (compared to the S&P 500’s 9.9 per cent). But last month in his annual letter to shareholders, the Oracle of Omaha complained about the difficulty in finding big companies to buy at a “sensible purchase price.” As a result, Berkshire is sitting on (US) $116-billion in low-yielding cash and government bonds.
“Buffett’s been a fantastic allocator of capital over the years and he’s assembled a very diversified portfolio of companies,” says Scott, in conversation with BNN. “He has a nice mix of consumer and industrial businesses within Berkshire Hathaway, but he is having some difficulty putting some capital to work.”
Scott points out that Buffett’s strength has been his ability to allocate capital counter-cyclically when opportunities present themselves but that approach has less impact when economies are humming along.
“[Buffett] has that famous quote, ‘Be fearful when others are greedy and be greedy when others are fearful,’ and that speaks to his capital allocation mindset very well,” says Scott. “He’s had a phenomenal career at that, obviously, especially later in the cycle when valuations creep up and everybody’s asking price creeps up. He was deploying a lot of capital back in 2009 and 2010 when the prices were there and there were opportunities to be had and when companies needed capital and were willing to pay up for it and that’s just not the case today.”
Over the years, Buffett’s predilection has turned from investing in companies to buying them outright. But the current “drought” in deals, as he called it, resulted in his making only one “sensible stand-alone purchase” in 2017, a 38.6 per cent stake in Pilot Travel Centers LLC, owners of the Pilot Flying J truck stop chain, for which Berkshire paid US$2.76 billion. The deal came with an agreement to increase ownership to 80 per cent in 2023.
Buffett wrote that part of the problem has been the “army of optimistic purchasers.” “It’s because the CEO job self-selects for ‘can-do’ types,” Buffett wrote. “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.”
Scott says although Buffett is advancing in years (he’s 87), the eventual hand-over at Berkshire is likely to go smoothly.
“Over the last number of years, succession has always been an issue and [Buffett has] built up that depth and bench strength behind him and he’s worked on that and they’ve diversified their operations,” says Scott. “So it’s not just about Buffett, it’s about the team that he’s assembled, but it’s a company where they are having trouble putting their cash to work, so you have to wait for those opportunities to come around.”