For more than five decades, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has shown Wall Street how easy it is to make money. After beginning with $10,000 in seed capital in the 1950s, Buffett has grown his net worth to $79 billion, as of this past weekend. He's also created more than $400 billion in value for Berkshire Hathaway's shareholders since 1965.
The predominant keys to Buffett's success have been his knack for buying businesses with sustainable competitive advantages and staying invested in those companies for very long periods of time. For instance, Berkshire's top-10 holdings by market value have been held for average of more than eight years.
Suffice it to say, when Buffett buys or sells stock, Wall Street and retail investors take notice. That's why the Aug. 14 filing of Form 13F with the Securities and Exchange Commission was such as jaw-dropper.
A 13F provides investors with a snapshot of what money managers with over $100 million in assets were up to in the previous quarter. Since the second quarter just happens to be one worst quarters for the U.S. economy in history, investors were rightly interested to know what one of the most successful investors on the planet has been doing with his company's money.
But not everything in Berkshire Hathaway's 13F went according to Wall Street's expectations. While exiting the company's stake in investment banking giant Goldman Sachs was predictable, as was the sale of the Berkshire's common-share stake in Occidental Petroleum, four other moves stand out as particularly surprising.
Berkshire Hathaway bought a gold stock
There's no question that the biggest surprise of them all was the purchase of 20.92 million shares of Barrick Gold (NYSE: GOLD).
It's not the $564 million that Berkshire bought that's astounding, so much as the fact that Berkshire now owns a gold-mining stock after the Oracle of Omaha touted physical gold as a terrible investment for decades. Buffett has previously been critical of gold's lack of utility, which is to say that gold doesn't produce anything. Rather, he prefers Berkshire buy into businesses that create products or offer services in order to generate consistent or growing cash flow.
Why'd Buffett buy Barrick Gold? My personal suspicion is that it wasn't Buffett at all, but rather one of his two investment lieutenants, Todd Combs or Ted Weschler. Based on the sheer number of pared-down stock sales in the past two quarters by Berkshire Hathaway, which is very un-Buffett-like, it would appear that Combs and Weschler are being given more control over day-to-day asset management.
Despite Buffett's long-lived distaste for the lustrous yellow metal, I expect the Barrick Gold selection to work out for Berkshire Hathaway. Historically low bond yields and a ballooning money supply in the U.S. should be positive for the price of gold. Meanwhile, Barrick Gold has done well to reduce its net debt and should see an uptick in its free cash flow in the quarters to come.
JPMorgan Chase received a big haircut
Bank stocks are absolutely Buffett's favorite place to park Berkshire Hathaway's money, so you can imagine the surprise when the company's 13F showed that 35.5 million shares of JPMorgan Chase (NYSE: JPM) had been sold in the second quarter.
Why reduce the company's stake in JPMorgan Chase by 61% but build up the company's position (in recent weeks) in Bank of America (NYSE: BAC)? The best guess I can offer is that Buffett is consolidating some of his financial sector holdings and angling to take advantage of Bank of America's interest rate sensitivity for when the Federal Reserve begins raising rates again.
Although JPMorgan's investment banking business has been fantastic, consumer banking loans fell 7% during the second quarter, and the company set aside a whopping $10.5 billion as a provision for credit losses. These loan loss reserves are probably going to build in the quarters to come as coronavirus-related loan delinquencies rise.
Again, this doesn't concretely explain "why JPMorgan Chase?' But with Todd Combs on JPMorgan's board of directors and Berkshire heavily selling its position, it certainly raises an eyebrow.
Visa and Mastercard are trimmed
Another surprise in Berkshire Hathaway's 13F is that the United States' two top credit card payment processors, Visa (NYSE: V) and Mastercard (NYSE: MA), were both modestly reduced. Berkshire cut its stake in Visa by 575,000 shares to about 9.99 million, whereas Mastercard was trimmed by 370,000 shares to approximately 4.56 million.
Again, the question to ask is, why? If there are two companies that have proved highly recession-resistant in the financial sector, it's Visa and Mastercard. With the exception of 2009 for Visa and 2008-2009 for Mastercard, these two payment processor have overseen an increased amount of payment dollars traversing their credit card processing networks over the past 13 years.
Furthermore, Visa and Mastercard aren't lenders, like some of their competitors. Even though this means no ability to double-dip via interest income and merchant fees during periods of economic expansion, it also means Visa and Mastercard have no direct liability when credit delinquencies begin to rise during an economic contraction or recession. This is why both Visa and Mastercard sport enviable respective profit margins of 51% and 45% over the trailing 12 months.
Given the relatively small size of these reductions by Berkshire Hathaway, it's possible it could be the work of Combs or Weschler. But no matter who did the selling, they're probably going to regret it.
Buffett was a big net seller of equities
Finally, investors will note that the Oracle of Omaha and his team sold far more stock than they purchased during the second quarter. It's certainly shocking when you consider that the coronavirus stock market crash was the quickest and steepest in history, and that Berkshire Hathaway is sitting on a record amount of cash.
Even though Buffett has put roughly $12 billion to work recently by purchasing more than $2 billion worth of Bank of America's common stock and acquiring natural gas transmission and storage assets from Dominion Energy for $9.7 billion, he's made clear through his actions, or should I say lack thereof, that he's no fan of equities at the moment.
Warren Buffett thrives off of value. However, finding value beyond repurchasing shares of his own company's stock has proved challenging. Considering Buffett's track record, it's far too soon to be put off by his lack of action in recent years. But the Oracle of Omaha's inaction might well represent a silent warning to investors that equities aren't as attractive as they may appear.
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Sean Williams owns shares of Bank of America and Mastercard. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Mastercard, and Visa. The Motley Fool recommends Dominion Energy, Inc and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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