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Buffett's range of possibilities

A lot could happen, but most of it won't actually happen

Buffett's range of possibilities

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"It's only when the tide goes out do you learn who has been swimming naked." "Investing is simple, but not easy." "A very rich person should leave his kids enough to do anything, but not enough to do nothing." "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes." "If past history was all there was to the game, the richest people would be librarians."

Over the decades, Warren Buffett's annual letters to his shareholders as well as his annual shareholders' meet have provided a rich source of pithy sayings and aphorisms that are a guide not just to investing and money, but to life in general. The annual meet, which is held in early May every year, was obviously cancelled as a physical event this year, although the Q&A with Buffett was held as it always is. The online audience was there like every year, perhaps even larger than it normally is.

It was interesting that Buffett chose to hold this session in the same giant auditorium in his hometown of Omaha, Nebraska as he always has. The only difference was that there were 18,000 empty seats instead of jam-packed ones. It was symbolism of a kind that is hard to achieve in the synthetic digital environment of Zoom or Google Meet. It made the whole event feel like a dress rehearsal for the normal one, with an implicit assurance that the audience was just temporarily missing and would be back in full force sooner rather than later.

To me, it seemed like a deliberate counterpoint to the all too common talk of how everything will change in terms of people's behaviour and everything will be digital and virtual and remote and so on. Human beings are a gregarious and social species and the kind of interactions that form the backbone of all human activity cannot be done with digital links and perpetual social distancing.

As Buffett said in his remarks, when the crisis first broke, the range of possibilities seemed extraordinarily wide, both on the health side and on the economic side. Now, a couple of months down the line, the possibilities have narrowed down on the health side, not to the best case but neither to the worst. However, on the economic side, the range of possibilities are still very wide, as he put it.

Despite the fact that Buffett talked of resilience and recovery, Berkshire has sold off a lot of stock. Most notably, they have sold off all of the airline stock they owned. While this would seem like a normal reaction to a routine punter, coming from the kings of the long-term, this does seem to be a little shocking. Look back to the top of this article and reread the quote about investing for ten years. Taken in that context, Buffett getting out of all airlines in one fell swoop does look like a damning indictment of the long-term future business prospects of the airline business. Of course, as many analysts would point out, this does not mean all airlines all across the world and a thinning of the herd along with lower fuel prices could mean very different outcomes than the worst case but as an indicator of the confidence level in not just airlines but so many allied businesses.

However, we must note that Buffett and Munger are not in the prediction business, but in the business of managing an investment portfolio from a most conservative perspective. The fact that they sold out of all airline stocks means that they have considered the range of possibilities, to use Buffett's own phrase, and would rather stay clear than venture to make a guess. Maybe the best of possibilities would play out, but there are better things to do with that money.

This difference between what a bystander would predict and what someone with actual skin in the game would do is going to be a major factor in how the fate of investments and real businesses would diverge. I suspect it also lies at the bottom of the generally gung-ho attitude that the equity markets have displayed during April.