Buffett Worried $137 Billion Is Not Enough

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed how Warren Buffett Is Worried That $137 Billion Is Not Enough. Here’s an excerpt from the episode:

Tobias Carlisle:
How did you take the news that they hadn’t done much in the way of buybacks because they were worried that a 137 billion, whatever it is, might not be enough?

Jake Taylor:
It didn’t bother me. The other thing he talked about was the optionality of the cash, and I think that’s another huge data point there. That’s him telegraphing, I think, that I think I’m going to be able to put this cash to work at much more favorable rates than buying back my own stock at whatever, 1.2 ish or price-to-book at this point.

Jake Taylor:
So it doesn’t bother me at all. Who am I to call out Buffett buying something that he knows better than anyone?

Tobias Carlisle:
I don’t mean so much criticizing him, I just mean the implications of what he has said there. Like that really was the thing that I took away the most, that they didn’t do a great deal as the market fell, didn’t buy back a great deal of stock, didn’t go and buy a lot of stock. Really just sold some stuff. Very, very uncharacteristic for Buffett.

Tobias Carlisle:
Like you look at every other time that the market’s gone down, they’ve been pretty aggressive through those periods. That was the thing that really gave me to fear. Like I tweeted this thing out yesterday, my Sunday scaries, my Monday scaries was that thought that Buffett’s running around with $137 billion and worried that that might not be enough given that they got some huge cash flows going into that business too.

Jake Taylor:
Yeah, I think in general they’re probably in pretty good shape internal cash flow wise. I wouldn’t expect a ton of money to be consumed inside the business at this point, like that excess capital absorbed by basically internal losses. I could be wrong, but you never know what’s hiding under insurance. That’s why it’s so important to trust whoever is the underwriter, just like a bank.

Jake Taylor:
But they’re Railroad, and I guess if things get too bad, there’s a lot of fixed costs there, but it’s not as bad as other businesses. The energy I think is probably relatively good shape. I don’t know, not oil, it’s like solar panels and stuff that have long term power purchase agreements. So anyway.

Bill Brewster:
Got some pipeline exposure, but yeah.

Jake Taylor:
Yeah. No, and I mean they have retail, they have other things too that are definitely problematic, but this coronavirus I don’t think came after them as hard as some other businesses in general.

Bill Brewster:
Well, and also I mean I don’t think that we have held people out. I think that we have gotten through a liquidity crisis and now on the back end of it you’re going to have balance sheets that are very impaired and you’re going to have some reasonably good businesses that have bad capital structures on the back end of this.

Bill Brewster:
And what does a business owner in January feel like if the current iteration of the world is continuing? Do they still want to have their family’s risk on the line, or do they want to de-risk a little bit? Do they want to enter some sort of pilot J-type transaction where they can sell 20 some-odd percent this year and then run it for five years, and then sell the rest?

Bill Brewster:
I mean there could be transactions out there, nine to 12 months down the road, just because he didn’t bottom tick March. I mean, look, I wanted a bigger buyback. I mean, but after I listened to him talk, I want my wife to do certain things, she wants me to do certain things, we don’t do… this is going to stay above board here, but it’s like investment and partnership, it’s like a marriage, right?

Bill Brewster:
And there’s going to be periods over a long term holding where you disagree with your manager. I think after he explained how he was thinking about it, it’s hard to call it negligent. It may be something that I disagree with, it might not be how I run my portfolio, but I get it. They might be too big. I mean that’s a legit criticism.

Tobias Carlisle:
Not too big to buy back though?

Bill Brewster:
Yeah, I know.

Tobias Carlisle:
I think the thing that he said when he was talking about the buybacks was that it was a little bit confusing to me the exact phrasing of it, but he said down 30% and then he kind of went on to another thought. And I just wasn’t sure if the two were connected together, but he said, “I don’t see it’s any better value now than it was before all of this went on in kind of late December last year.”

Bill Brewster:
Oh yeah, I think it’s connected.

Tobias Carlisle:
But was he saying down 30% it wasn’t any better value?

Bill Brewster:
Yeah, because I think what his argument would be is that the downside distribution of the probability tree, you have increased your probabilities of the downside occurring and the downside has gotten wider.

Tobias Carlisle:
So it narrows your intrinsic value estimation.

Bill Brewster:
That’s right, yeah.

Tobias Carlisle:
Because the downside pulls down your midpoint. Yeah, okay.

Bill Brewster:
Yeah, it might not do shit to some point estimate that somebody DCFs, but like if you really think through what are all the probabilities out here, he’s saying like the distribution of outcomes is pretty freaking wide, and the losses could be pretty big. I think that’s new information for him.

Tobias Carlisle:
I thought the whole thing was he was quite subdued. It’s hard to tell, because there’s no crowd there, there’s no laugh track to what he’s saying. But I thought he was very subdued, and as it kind of went on I was trying to work out why he was so subdued. And then I thought it’s probably appropriate. We are right in the middle of… the coronavirus is still around, lots of people don’t have jobs, you don’t want to come out and be too kind of-

Bill Brewster:
Ra Ra.

Tobias Carlisle:
… too quippy, but you contrast that with 2008, Buy American. I Am, versus this time around. T Buy American. I Am, was a little bit aspirational, inspirational, we’re actually doing it here. This time around it sounded like, “Be careful. I Am.”

Jake Taylor:
Yeah.

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