This is why Buffett isn’t ‘buying America’

globaleconomies risk stock May 27, 2020

Berkshire shindig

In October 2008 Warren Buffett famously said:

‘Buy America, I am’.

It was an awful time for the US and global economies, but stocks were cheap and devoted followers that took his advice profited handsomely.

Berkshire Hathaway’s recent 2020 Annual Shareholders Meeting was a much more subdued affair, which some attributed to the lack of audience interaction, or perhaps to the absence of sidekick Charlie Munger.

Others said it mightn’t have been appropriate for Buffett to be rubbing his hands together about the prospect of buying stocks while US jobless claims are soaring to 40 million to beyond.

Not unusually a small cohort suggested that Buffett has lost his golden touch, or perhaps that he’s even losing his faculties.

Occam’s razor

Berkshire hasn’t been buying stocks heavily, and in fact has been offloading its airlines and some other positions.

A raft of theories have been out forward, but the most obvious reason Buffett didn’t say that this is a great opportunity to buy stocks is simply that it isn’t.

A CAPE ratio of close to 30 has never historically been sustained for long, while a US recession will inevitably lead to very high unemployment and a wave of bankruptcies.

Of course, a high CAPE ratio can always go higher; but history shows that the higher it goes the harder it tends to fall.

Occam’s razor suggests that Buffett thinks there’s too little reward and far too much risk from moving towards fully invested at these prices.

I discussed these ideas a little further in the short video here

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