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Don’t Bet Against America

Berkshire Hathaway’s annual meeting took place in an unusual set up – a virtual meeting, without Charlie Munger being present. Yet, Warren Buffett’s comments will likely affect the financial market’s performance this week, especially considering that many investors closely watch his moves.

One of the biggest puzzles during this health crisis was why Berkshire, sitting on a pile of cash, did not utilise this. After all, the stock market dropped over thirty percent from all-time highs, slashing valuation for many interesting businesses.

Berkshire, though, chose to sit on the sidelines. Unlike the 2008 financial crisis, when Berkshire was actively involved in buying underpriced companies, today’s health crisis led to a different reaction from the world’s most admired investor.

To the surprise of many, Berkshire did not buy but sell. As it turned out, it liquidated its entire stake in the airline industry – a move that will most likely have repercussions on the already battered airline companies.

Berkshire Consolidates Its Cash Position

The reason for selling the airlines was that the world has changed due to the coronavirus crisis. And, because of that, suddenly there are too many planes and fewer customers to service.

However, investors are likely to look beyond Buffett’s words. If Berkshire cannot find an investment worth considering after such a selloff, it may mean two things.

One is that the current market selloff is not over, meaning the lows are not in place, and the stock market’s path of least resistance points to the downside. In this case, Buffett’s comments will most likely add fuel to the fire and send US stock indices lower.

Another one is that Buffett turned pessimistic. After all, this is a crisis like no other, and it may require an even stronger cash position for Berkshire. The end of the Q1 2020 sees Berkshire holding a whopping $137 billion in cash and equivalent instruments and having no desire to deploy it. On the contrary, it sold its US airlines’ stakes.

Maybe the world changes too fast for a giant like Berkshire to adapt quickly. After all, beating the street is easier when small, but increasingly difficult as the size of the investment vehicle grows.

But one thing did not change for the one investor that always bet against the doomsday – Buffett still believes in the American economic miracle, and he is sure America will prevail, yet again. In the meantime, though, Berkshire sold its US airlines’ stake.

Is this the way Buffett telling the world that more troubles lie ahead for the stock market?

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