We have followed John Huber of Saber Capital for a few years now. We enjoy his interesting articles (he used to run Base Hit Investing but rolled the blog into his fund) including one on financial panics in hindsight (TLDR: Go for a walk!) - http://sabercapitalmgt.com/market-panics-in-hindsight/
He recently did an interview on the Acquirer’s podcast with Tobias Carlisle. It’s a good watch and it also covers a question we have been pondering – Why didn’t Berkshire buy stocks in this downturn? They were actually a net seller, getting out of all the airlines.
John’s thoughts:
I think Buffett is cautious because I think he doesn't want to see the boat that he's spent 50 years building start to develop holes when he's 90 years old. Many times in the past he's talked about all sorts of different debacles like the LTCM (Long-Term Capital Management) debacle in the late 90s, which was a famous example of sort of greed gone haywire or greed on steroids or something, where so much leverage was used by extremely smart people to produce more money that they didn't need. He's got this quote that basically says you know once you're already rich you don't need to get rich again basically.
And so I think the issue with Berkshire right now is he could, and this is just my complete speculation - I don't know that this is the case, but I think he could be looking at the environment and seeing potential for significant litigation in business interruption insurance, potentially workers compensation, which Berkshire is a big underwriter of. In fact there's one court case in in France last week where AXA is going to have to - basically the French Court ruled that they are going to have to reimburse certain restaurants for two months of revenue. I think if you if you start to violate contract law and even if it's clear that these contracts do not, you know, pandemic is carved out you - if you're just going to start to override that then then who knows. How do you handicap that, who knows what the lawsuits could be – it could be a hundred billion. I think Buffett has said before that Berkshire is fit to withstand a $250 billion dollar hurricane season or even more, which would be multiples of the worst hurricane ever. I forget what damage Katrina caused but it would be multiples of that, and Berkshire wouldn't even see its see any hit to its capital, so it's an extreme fortress. I don't think there's any doubt it still is an extreme fortress but I think when you have the uncertainty of the pandemic possible litigation it's hard to know what the what the claims will end up being when the dust settles from this.
The other thing Buffett said, it didn't get a lot of publicity, but I think he tipped his hand a bit when he said there's no law that says a major storm can't come during a pandemic. So if you have a Katrina this summer and you combine it with all of the possible claims from the pandemic it could be it could be sort of a once in a 500-year flood and I think he just wants to be prepared for that. And I think he probably views that as a tail risk that's probably got one or two or three percent or even lower odds, but he said before that he doesn't want to take even a 1% chance of something bad happening so I think that's more likely the reason why he wasn't more aggressive in buying stocks.