In 1998, Warren Buffett lamented the lack of good investment opportunities for Berkshire Hathaway. He was waiting for what he called his fat pitch, a home-run deal. Instead, the sprawling conglomerate was on the sidelines. “Standing there, day after day, with my bat on my shoulder is not my idea of fun,” he said at the time.
This week, for the first time in six years, Buffett decided it was time to take a big swing.
The hit, an $ 11.6bn deal to buy insurer-to-toy manufacturer Alleghany, ended a drought that had unnerved investors and raised questions over whether the billionaire investor had the chops to compete with more aggressive private equity bidders. Disclosures in the preceding days also showed Berkshire had built a stake worth about $ 8bn in the oil producer Occidental Petroleum’s common stock.
Share repurchases apart, these two transactions amount to the biggest capital deployment by Berkshire since the pandemic rocked markets in 2020. They show an investor that is finding pockets of value in the US stock market even as war roils Ukraine, raising the prospects of economic slowdown and higher inflation.
“Buffett buying now in the face of all uncertainty – the geopolitical and economic and interest rate uncertainty – is a real vote of confidence in the US and global economy,” said Christopher Rossbach, chief investment officer of J Stern & Co. longtime Berkshire shareholder. “He is telling us that he believes there is value and that you can buy companies that will do well and will deliver more value than cash.”
The investments, both clinched after Russia invaded Ukraine, are a change from Buffett’s approach two years ago, as Covid-19 spread and the global economy tipped into recession.
At the time, he sold out airlines and cut his holdings in big US banks, which were putting away billions of dollars in reserves to protect against potential losses on loans. Even when the market rallied that year, he remained cautious. He applauded the intervention by policymakers in Washington but made few of the investments that had characterized his behavior more than a decade earlier during the financial crisis, when he wrote loans to blue-chip companies and put Berkshire’s war chest to work.
His return to the market this year has signaled to some that he believes the war in Ukraine is unlikely to prompt the same fallout as the pandemic.
“Obviously the chances of escalation have increased,” said Edwin Walczak, a portfolio manager at Vontobel. “But. . . maybe the risk in [Buffett’s] mind was more readily quantifiable than in the pandemic. ”
He is diving in at a volatile moment. The stock market has swung violently this year, with the average company in the Russell 3000 – an index that includes both large and small businesses – down more than 30 per cent from recent highs. Investors have rapidly adjusted portfolios as inflation has surged and the Federal Reserve has raised interest rates for the first time since 2018 in response.
Berkshire shares, by contrast, have rallied 18 per cent this year, far outpacing the S&P 500. In 2021, they gained nearly 30 per cent.
The company has benefited from a market rotation, as investors favor shares of utilities, energy companies, industrial goods groups and banks over tech companies. That has played directly to Berkshire, which has an empire ranging from the BNSF railroad, to insurer Geico and metalworking subsidiary Iscar, as well as a $ 351bn stock portfolio, with multibillion-dollar investments in Apple and Bank of America.
This month’s deals also align with a slowdown in share buybacks, which Berkshire had spent aggressively on when, in Buffett’s words, “alternative paths become unattractive.” He estimated in February that the company had spent nearly $ 52bn on buybacks in 2020 and 2021, but just $ 1.2bn from January to late February this year.
“The shares are not as attractive to repurchase,” said Christopher Bloomstran, president of Berkshire-shareholder Semper Augustus. This is in part why Buffett and his investment team are looking outside the company.
Meyer Shields, an analyst at KBW, said the deals showed Berkshire management “are seeing opportunities”. He added that they would not “detract from Berkshire’s ability to do an ‘elephant-sized deal,” given the company had $ 146.7bn of cash at the end of last year. Its subsidiaries throw off more than $ 100mn of cash every day.
Alleghany and Occidental were familiar companies for Berkshire well before recent investments. Alleghany, a property and casualty insurance and reinsurer, has long been described as a mini-Berkshire Hathaway. Its chief executive, Joseph Brandon, was a former executive at Berkshire subsidiary General Re. Buffett called him a “longtime friend” when announcing the deal.
“Warren Buffett likes to invest in his circle of competence and he’s no doubt followed this company for decades,” said Matthew McLennan, a portfolio manager at First Eagle Investments, which owns Berkshire stock.
His connection with Occidental goes back at least to 2019, when Buffett agreed to supply $ 10bn to help the oil and gas company clinch a hostile takeover of Anadarko Petroleum. That deal, in a sector that Berkshire only occasionally strays into, nonetheless had many of his classic hallmarks: expensive takeover funding used by a company in part for the Buffett seal of approval.
Investors said this week that they were keen to see the company’s next quarterly stock disclosures, due in mid-May, that will show if Buffett or his investment lieutenants Todd Combs and Ted Weschler have been on a wider buying spree.
The 91-year-old investor, who did not respond to a request for comment for this article, has not yet offered insight into his motivations for the Occidental investment or whether the market turbulence since he wrote his most recent annual letter in February have changed his view. At the time, he said he was finding “little that excites us”.
Lawrence Cunningham, a professor at George Washington University, said it may have changed. While Buffett now faces intense competition from private equity groups on big takeovers, he is still finding “quintessential Buffett” deals, Cunningham added.
“Now the pitches are coming over his plate, right at his speed,” he said.