In Focus: What is Buffett Telling The Markets?
Warren Buffett, the Oracle of Omaha has been critical of gold for a long time. He has expressed that the "magic metal" has no utility, and in Buffett's opinion an investment in good American companies was a better investment than gold. This has been true for Warren Buffett who is considered one of the best stock pickers / investors of all time.
The reality of the situation though is that from January 2000 to present day Gold has increased by 593%. During the same time the S&P 500 has increased 129%. For the average buy-it, set-it-and-forget-it investor, gold was the better play.
But investors who would've invested in gold futures in 2000 would've missed out on dividend payments, which could've been used to invest in companies that were out performing the stock market and the gold market.
In any case, Buffett caught the investment world off guard with two major moves. Buffett purchased a gold company and he sold off a large portion of his bank holdings.
What is Buffett Signaling to the Markets?
Buffett's recent moves could mean a lot or they could mean very little.
Buffett's moves could mean a lot because Buffett has been a big investor in banks throughout the years. In my Buffett Sells a Bank piece, I discussed how during the Great Financial Crisis, partly created by banks, Buffett made one of his greatest investments in Goldman Sachs. Through the Wells Fargo account scandal that cost Well's customers lots of headache and Wells Fargo shareholders billions of dollars, Buffett stuck with bank,
In 2008 when Buffett made his Goldman Sachs investment he stated he made the investment because he believed the government would bail out the big failing banks at the time, and the U.S. government did to the taxpayers dismay.
So now, as the markets are flying, and Wall Street is looking forward to the markets making new highs, Buffett scales down his bank positions.
The other reason why Buffett's move could mean something significant, is that gold, in my lifetime, has been a place where investment dollars flow to when investors are weary of the stock markets. Gold has been a safety play for investors who needed to put capital preservation over capital appreciation. Is Buffett telling us that he is weary of the stock markets with his investment in Barrick Gold (GOLD)?
There has been no bigger cheerleader for the stock market and buying American companies for the long-term than Warren Buffett. If he's selling banks and buying a gold company does that mean he sees tough times ahead for the stock market, and is he positioning himself for those tough times?
However, on the flip side Buffett's moves could be nothing, just a reorganizing of the portfolio. Buffett made headlines earlier in the year when he sold his airline holdings, as Buffett, like many other investors, saw the airlines not returning to normal business for quite a while. He could be doing the same here with banks.
As we stated earlier, Buffett along with partner Charlie Munger are some of the greatest investors to ever live. The draw down on their banking positions could be because they have their eyes on other value plays in the market.
The headlines about the Barrick Gold investment did what headlines are supposed to do, get us interested so that we click and read a story that tells us very little.
Under the hood of it, Barrick Gold is a typical value investor's company. The company has more tangible assets (cash and cash equivalents, inventory, and property, plant, and equipment), $29.7 billion, than they do total liabilities, $14 billion, according to Yahoo Finance. The company has a profit margin of 39%, a return on equity of 22.3%, and solid free cash flow generation. Buffett buys gold is the headline, but the real story is Buffett buys another solid undervalued company that so happens to mine gold.
I, like Buffett, have always been a critic of investing in gold. I'm the person that says, every piece of gold ever mined is still on earth, how valuable can it be? But that aside, while I think the markets are headed for a decent sized pull back, I don't think Buffett's recent moves are a signal of something major to come.
Again, I feel markets are due for a correction. I believe if this correction happens it will be the knockout punch for a lot of companies, and bring many others well below their intrinsic value, which gives investors with lots of cash lots of options to buy cheap companies.
Buffett's bank positions have done well for him, but the financial industry has underperformed the markets since the market's rally off of the March pandemic lows. What the charts tell me is there are better places to deploy cash than banks at this time, and Buffett may feel the same way.
Buffett selling banks has been an interesting theme for 2020, but I don't think investors should read too much into it. The banking system isn't failing or dying, at least not in 2020. I don't think the sale of Buffett's bank positions can be put in the same boat as the sale of the airline positions earlier in the year. The coronavirus had a direct impact on the airlines, but the major investment banks were able to have a blowout Q2 in 2020. The investment in Barrick Gold doesn't mean the stock market is going to crash. The investment appears to be a nibble at a company with a strong balance sheet that could possibly become a Berkshire Hathaway company in the future.
If there is a signal being sent by Warren Buffett, it's that bank stocks are stalling, and there's bigger money to be made elsewhere, and that he still loves undervalued companies with strong balance sheets.