Back in October 2008 during the depths of the Great Recession, Warren Buffett wrote an article in the New York Times titled “Buy American. I am.” He outlined that he was buying American stocks in his personal portfolio. He stated, “a simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” At the time, I thought he had finally lost his touch and I personally continued to remain bearish. In 2008, I was working at a long/short global hedge fund covering the financial sector. I had a front-row seat to the destruction that was occurring to the balance sheets of America’s top financial institutions. Initially, I was proven right as the market continued to tank throughout the remainder of 2008. Buffett didn’t know when the bear market would end but he was confident that stocks would do well over the long-term. However, the market finally bottomed in March 2009 which marked the beginning of the longest bull market in post-war US history. It turned out to be one of the best buying opportunities in my lifetime. Naturally, the question arises whether the coronavirus led crash of 2020, the Great Lockdown, is another buying opportunity of a lifetime?
The Economy Has Suffered an Exogenous Shock
First, the lockdowns instituted across the world have left the global economy reeling. There has been an exogenous shock to global aggregate demand, which has led us into a global recession. The Economic Cycle Research Institute (ECRI) measures recessions by their depth, diffusion, and duration. In terms of depth, we only have to look at the chart of Initial jobless claims to see that we’re not facing a garden variety recession. The grey shaded areas in the chart reflect U.S. recessions. We can see that during the Great Recession initial jobless claims never reached the extreme levels we’re seeing now. Diffusion measures how many industries are impacted by a recession. Clearly, virtually all industries have been negatively impacted and the crisis remains global in nature. Depth measures the length of the recession. For example, the Great Recession lasted 18 months. Given the severity of the coronavirus led shutdowns, the current recession has been extraordinarily deep. However, the demand destruction that has occurred was in a sense artificial. Once the lockdowns end we should see a surprisingly quick resumption of economic activity, leading to one of the shortest recessions on record.
Lakshman Achuthan, a co-founder of ECRI, recently wrote “if those shutdowns start ebbing by summertime, the economy will begin reviving, albeit slowly and partially. As a result, the level of economic activity – in terms of output, employment, income, and sales – will necessarily rise above the lows seen during the worst of the closures. By definition, when such economic activity starts to increase on a sustained basis – even slowly from a low base – the recession will have ended.”
Essentially, the coronavirus led recession will be brutal but short. Thus, the economy should rebound as soon as the global economy is opened up. We can argue about how long the lockdowns will last but in my view, economic activity will pick-up dramatically as soon as they end.
The NIFTY hit an all-time closing high of 12,355.5 on January 16, 2020. Following the global coronavirus outbreak, the index hit a 52 week low of 7,511.10 on March 24th, resulting in a precipitous 39% decline. The NIFTY has subsequently rebounded and is now up 23% from the 52 week low. At the peak, the market was trading at a 28.6x TTM P/E multiple. At the low, the index was trading at a 17.6x TTM P/E multiple and we’re now trading at a 21.2x TTM P/E multiple.
During the last buying opportunity of a lifetime, the Nifty traded at a 10.7x TTM P/E multiple in October 2008. Thus, it’s difficult to argue from a valuation perspective that the market is cheap on an absolute basis. Even on a relative basis, the current 10-year yield on GOI bonds is 6.03%. In comparison, the Nifty Index is currently trading at an earnings yield (the inverse of the P/E ratio) of 4.72%. In comparison, at the 2008 lows, the market was offering an indisputably attractive earnings yield of 9.4%. At best you can say that the market is fairly valued given the economic uncertainty and business risk facing most Indian companies. However, current valuation levels don’t support the view that the latest correction is a once in a lifetime buying opportunity.
2020 Berkshire Hathaway Annual General Meeting
On May 2nd, Warren Buffett held his 2020 Berkshire Hathaway Annual Shareholder Meeting. For the first time in history, the meeting was conducted virtually and without any shareholders. Even Buffett’s longtime partner, Charlie Munger, didn’t attend. Admittedly, it was a bit jarring to see a completely empty convention center, but in the wake of the coronavirus crisis, nothing is out of the realm of possibility. Buffett spent the first hour of the meeting giving us a history lesson about the resiliency of the US economy and the stock market. The entire meeting can be summed up as “always bet on America” but “anything can happen in terms of the market.” I was honestly underwhelmed. Don’t get me wrong. Buffett is the GOAT: greatest investor of all time. However, I was expecting a replay of his message in his “Buy America. I am”, article. I wanted to hear the soothing, comforting, and confidence-inspiring words that America and the world would come out stronger than before and that he was deploying his cash as fast as he was generating it. Instead, we got a tepid short-term outlook and a moderately positive long-term outlook. More importantly, we learned that he basically didn’t do any buying during the first quarter of 2020. Actually, he ended up selling his entire position in the airline industry. The general take from analysts and investors is that this is the most bearish anyone has seen Buffett. He’s still bullish on the US economy and stock market long term, but he’s holding on to his massive cash reserves. In my view, his actions speak louder than his words. If Buffett is correct, then the current market correction isn’t yet a lifetime buying opportunity.
If we did have a short recession, then it would support the belief that we have a unique buying opportunity. Assuming that the lockdowns globally were lifted by this summer, the global economy would revive quickly and support a rebound in the equity market. Unfortunately, the valuation level of the Indian equity market is not supportive. The Nifty would have to trade at least an equivalent earnings yield to the 10-year GOI (Government of India) bond to be viewed as being unequivocally cheap. This would approximate a Nifty TTM P/E multiple of 17x. It’s interesting that the market hit this valuation level at the March lows and then subsequently rebounded. We would have to see a further correction from current levels to justify the view that it was a buying opportunity of a lifetime. Finally, Warren Buffett is sitting on the sidelines despite holding a record $137.2 bn in cash. Given Buffett’s track record for calling the bottom of the 2008 crash, his current inactivity is a clear sign that the market is still not providing an attractive buying opportunity. As an investor in the Indian equity market, the best strategy is to simply focus on adding individual companies to your portfolio as opposed to making broad market bets.
Due to the recent crash there are a number of individual stocks that have strong business franchises, fortress balance sheets, and are now trading at attractive valuation levels. I own a few of these types of companies in my personal portfolio. Although I’m no longer publishing the Value Investing India Report Premium Access Service, I’m in the process of launching a “follow my portfolio” service that will allow you to replicate my portfolio and give you insights into my current holdings. Please stay tuned for further emails about the launch of this new service.