Photo Credit: Javier || THis is a much younger version of Buffett. Has the present Buffett learned to adapt?

Barron’s ran an article called Why Berkshire Hathaway Stock Has Rarely Been This Cheap. It was written by Andrew Bary, a man that I respect. I wrote a comment at the article, and it reads as follows:

So long as the government & its commercial paper financing arm (The Fed) is willing to create grants and credit out of thin air to rescue businesses, Buffett will not get opportunities to buy stock at the discounts that he has liked to see in the past. The cash pile will grow, & BRK stock will likely muddle.

Buffett’s justification for the cash pile changed at his last annual meeting, saying BRK needed it for catastrophes from their insurance underwriting. He has always faced that risk, and in the past has said that he might need $20B for that. (And he commented that his insurance companies were well-reserved, which is probably true.)

Choices for Buffett: 1) lower his hurdle rates for purchase down to levels where the government starts to act. 2) let the cash pile grow, and buy a huge business with significant moats that he could never dreamed of owning. 3) Start a slow buyback of stock and set a slightly higher multiple of book for where to cut it off. 4) Pay a special dividend, or, start a regular dividend. 5)Tell the managers of the operating businesses to look for decent-sized private businesses that they admire, particularly ones with succession issues. Send Buffett a proposal, and he will send a price. You can make the offer to the firm to join the BRK family. 6) Give Ted and Todd and the operating managers lower hurdle rates for investment. 7) Just muddle along, as it is now.

Order of likelihood: 7, 2, 3, 5, 6,1, 4. I don’t think Buffett will change much.

Why Berkshire Hathaway Stock Has Rarely Been This Cheap

My main contention with Buffett, as I am a shareholder, is that you can’t rely on the past when considering how far the market may fall when there is a crisis.

The nature of the US economy is that the Fed, and maybe the Treasury, or Congress, may borrow money to bail out those in distress, partly because the US economy is so indebted, that they can’t let debts be liquidated, lest we have a depression. Thus, low interest rates, low marginal productivity of capital, and low GDP growth.

In such a situation, the market will not fall enough to offer the values of a lifetime. The Fed will dilute the capital stock to provide a rescue, while Buffett finds himself diluted. Buffett’s money can’t buy a good company at a cheap price.

I sold half of my holdings in BRK recently, after I learned that Buffett did nothing during the recent fall in the stock market. Market values are relative, and there were certainly decent values to be realized in late March. You wouldn’t blow the whole wad, but surely you should have bought something.

I may sell off the rest of my holdings in BRK. Under the right conditions, I would buy more. The question is whether Buffett has an outdated view of how much the market could fall, given the skittish attitudes of economic policymakers.

Full Disclosure: long BRK/B for myself and clients