The COVID-19 Economy
What Warren Buffett gets right (and wrong) on post-COVID-19 investing

Published on June 17, 2020 by Wojciech Gryc

The FT recently published an article arguing that Warren Buffett and Berkshire Hathaway are losing their touch.

• The company is sitting on $137B in cash.
• They typically avoids industries Buffett says he doesn’t understand, like technology or biotech.
• As a result, it’s been doing quite poorly over the past 6 months, losing about 20% of its value.

Warren Buffett is a more seasoned and successful investor than I am; I’d like to defend him and his strategy. He’s not losing his touch, but his industry focus shows what the broader investment community gets wrong – and what your own advisors or analysts might also be missing.

Berkshire Hathaway invests in traditional, tangible asset-focused companies. This includes banks, insurance companies (they own GEICO), railways, and until recently, airlines.

• This strategy works well in how they approach value investing; they understand when companies take risks with their physical assets and how much those assets are truly worth.
• These investors have a sophisticated and non-consensus (compared to other investors) view on how to depreciate assets properly, how to avoid metrics like EBITDA, and how to think about a company’s long-term potential.
• They have a deeply sophisticated view of how infrastructure, physical assets, and financial assets work.
• This allows them to make very long-term bets and find opportunities that other investors miss due to their focus on P/E ratios and accounting jargon like EBITDA.

The fact that they’re not investing right now tells me they don’t see good opportunities in these traditional spaces (like banking, retail, transportation, and consumer goods).

But the term “traditional” is important.. It tends to avoid hard and soft technology companies, like those in information technology, social media, and biotechnology. Many investors still don’t completely understand how “hard” and “soft” technology investments work and how to price them.

• Many companies (e.g., Google, Shopify, Facebook) tend to be physical asset-poor but data-rich. Valuing data is very difficult.
• These companies often facilitate transactions and take a cut of a broader market, rather than owning the market itself.
• If you include “hard tech” like biotechnology research, pharma, or cybersecurity and quantum computing, then this is even more difficult.
• Investment success depends on intangible assets generating cash one day, combined with experimental success in the short run. It’s immensely difficult to screen stocks or use traditional accounting measures to do so.

Case in point: how do you formally depreciate data assets?

Buffett and other traditional value and fundamental investors are being hit hard because COVID-19 is hitting the industries they focus on disproportionately hard.

Digital companies, as well as ones focused on transaction facilitation and digital/data products, are particularly resilient when it comes to their business models.

In short, Buffett isn’t losing touch... But if you’re an investor that follows traditional industries then you should revisit your asset mix. Don’t just look at your stocks/bonds/cash/ETFs mix but also differentiate between traditional tangible industries/investments, and those which are intangible and often overlooked by asset managers following the “Oracle of Omaha”.