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BSE Sensex slipped below the 32,000 mark in Monday’s trade, while Nifty fell below 9,300, amid concerns over a flareup in US-China trade war in an already fragile economic environment bogged down by the coronavirus outbreak.
Does it mean the recent run in stocks was actually a bear market rally, and that it’s time to sell stocks?
Many analysts feel so. Even investing legend Warren Buffett appeared to have hinted at that during his annual address to Berkshire Hathaway shareholders.
Berkshire’s earnings released on Saturday suggested that an otherwise jubilant Buffett, widely followed by investors the world over, did not buy stocks in March quarter. His company, in fact, sold $6.1 billion stocks in April and added to the already huge $137 billion cash pile and also to government treasury holdings.
Buffett’s speech, delivered online, made two-three prominent points.
First and foremost, he is expecting further fall in stock prices. Secondly, he does not see deep value in the market even after the recent crash. He is concerned because, he is unable to gauge the pandemic risk. But he feels that one should keep owning shares of companies that one knows better and sell stocks of companies where fundamental impact of the pandemic is difficult to gauge.
In short he is neither greedy nor fearful, but has turned realistic. Ferreting through his speech and responses to shareholders’ questions, we tried to cull out a few pointers that could guide investor behaviour in this market.
Accept mistakes
No, Yes and No! Buffett was once a staunch opponent of aviation stocks. Later in 2016, he changed his stance and bought shares in four American airlines. But the Sage of Omaha now says his company has dumped all the airlines stocks recently, even at losses.
Berkshire had an 11 per cent stake in Delta Air Lines, 10 per cent in Southwest Airlines, 10 per cent in American Airlines and 9 per cent of United Airlines as of December 31.
Like US aviation industry, activity at domestic aviation industry also has come to a halt. Domestic aviation stocks like SpiceJet and InterGlobe Aviation slipped 4-6 per cent on Monday as investors seemed to have taken a cue from the legend.
“The airline business changed in a very major way. The future is much less clear to me about how the business will turn out. The world changed for airlines, and I wish them well, but it’s one of the businesses we own directly that are going to be hurt.”
Takeaway: Invest only in those businesses that you understand. Accepting mistake is welcome.
Rajiv Thakkar, CIO, PPFAS Mutual Fund, said Buffett was very clear. “He recognises his mistakes and exits early even at losses. His view has been that things have become very uncertain and even if the lockdown eases, the number of air passengers will remain low for an extended period of time, which is unfavourable for the pricing dynamic.”
Stay rational
Berkshire saw $68.48 billion erosion in the value of shares the company held as of March 31. But it largely included unrealised losses. The Buffet company did not sell shares substantially.
This is even as the portfolio suffered a 27 per cent hit compared with a 20 per cent fall in the S&P500 index during the same period.
“I don’t know — and perhaps with a bias — I don’t believe anybody knows what the market is going to do tomorrow. I know America is going to move forward over time. And we learned this on September 10, 2001, and we learned this a few months ago in terms of the virus — anything can happen in terms of markets,” Buffett said in its first-ever online-only AGM on Yahoo Finance.
Takeaway: One needs to stay rational irrespective of market conditions.
“Buffett is not as jubilant this weekend as he was in the previous market falls. Instead, he looked a bit fearful,” said market veteran Raamdeo Agrawal. “He is fearful right now as one problem is leading to another. Buffett said he is not capable of figuring out what risks are right now. Covid-19 is the biggest unknown in Buffett’s life and he may not want to gamble on that unknown.”
Gauge market risks
Markets can stay irrational longer than one can stay solvent. In his presentation on May 2, Buffett recalled how Dow Jones fell 48 per cent to 198.69 by November 12, 1929 from 381.17 level on September 3 that year only to rally 20 per cent to 240.42 by his date of birth, (i.e. August 29, 1930). Yet, it took another 20 years (January 4, 1951) for the index to revisit that 381 level again!
“We faced great problems in the past. We haven’t faced this exact problem. We haven’t faced anything that quite resembles this problem. But we faced tougher problems, and the American miracle, the American Magic has always prevailed, and it will do so again,” said the Oracle of Omaha.
Buffett does not see deep value emerging in the US market. He feels the recent fall does not factor in unknown risks associated with the pandemic, and so, he has stayed on the sidelines.
Takeaway: One need not be pessimist, but gauging risks is key to investment returns.
Says Agrawal of Motilal Oswal. “There is a difference. In 2008, the US Fed was behind the curve and the fear crashed stock prices, so much so that there were doubts whether companies like Goldman Sachs will survive. This time, the Fed has front-loaded the entire relief. That is why stocks have bounced back and do not offer deep value, so far.”
Maintain psychological balance
During his speech, Buffett said the American tailwind is going to have unforeseen interruptions from time to time.
“You do not want to get yourself in a position where those interruptions can affect you either because you’re leveraged or because you’re psychologically unable to handle, looking at a bunch of numbers.” he said.
Buffett gave the example of a farmer whose neighbour offered him $2,000 for an acre of land he owns. A day later, the same friend offers the farmer $1,200 for the same piece of land. A day after, this friend of farmer cuts the offer price to $800 per acre.
“Are you going to let this guy drive you into thinking I better sell because this number keeps coming in lower all the time? It’s a very important matter to bring the right psychological approach to owning common stocks,” Buffett said.
Takeaway: Don’t let emotions take investment decisions. Also, do not be leveraged so much that it can give rise to desperate situations.
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