An Unexpected Buying Opportunity at Berkshire Hathaway

Berkshire Hathaway decentralizationChart via Larry Cunningham

When the UK surprised pundits, pollsters and prediction markets by voting to leave the European Union on June 23, 2016, financial markets around the world plunged over the next two trading sessions, including 5 percent declines in the S&P 500 and the Dow Jones Industrial Average.With many investors selling shares as the outlook for the economies of the UK, Europe and the rest of the world darkened, how would Warren Buffett and his portfolio managers at Berkshire Hathaway respond?

Buffett gave a clue when telling CNBC prior to the vote how he’d react to Britons voting to leave the EU: “It won’t make any difference to what Berkshire does,” he said. “It wouldn’t change one iota what I’m doing in businesses or stocks.”

Fast forward to this week, with Money magazine reporting that “losses in Berkshire Hathaway’s equity holdings could reach nearly $7 billion, which on a portfolio of $128 billion as of March 31, works out to a loss of about 5.4 percent. That’s actually slightly better than the S&P 500 over the same period. What’s more, Berkshire Hathaway’s losses are only on paper, unless he actually sells his holdings, which he rarely does.”

Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business, gives more insight: “With over $60 billion of cash on Berkshire’s balance sheet, it is likely they invested some of these funds in individual stocks they had been following, which would have become more attractive after this sudden decline.”

Kass says Warren Buffett and his portfolio managers have very long time horizons of at least 10 years and view short-term external shocks to the financial markets as buying opportunities. “With the S&P 500 (dividends included) compounding at approximately 10 percent annually over decades, and the outlook for long-term growth continuing to be very bright, Berkshire would have viewed this short-term decline as an unexpected buying opportunity.

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About the Author

Dr. David Kass
David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.

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