2023-03-17 07:00:00 ET
Summary
- Berkshire Hathaway purchased more shares of Occidental Petroleum.
- A huge "teaching moment" arises when Warren Buffett buys while others sell.
- The average investor wants out when a stock declines a given amount. Most great investors sell at the right time in a business cycle and so are buying now.
- The idea that a stock that declines 30 percent must increase approximately double that percent to get back to breakeven scares most investors.
- During a panic, many investors trade frantically all the way down or just plain give up until the good times return for a few years.
(Note: This article was in the newsletter on March 16, 2023.)
Berkshire Hathaway ( BRK.A ) ( BRK.B ) recently purchased more shares of Occidental Petroleum ( OXY ) to raise its stake past 23 percent. Warren Buffett is displaying that patience he is noted for over many decades. Here he is during a panic purchasing more shares of what he believes to be a bargain despite everyone around him "heading for the hills" in a panic.
What has always amazed me about a time of panic is the sheer number of investors that want out because a stock declined. It is almost as if they had no faith in their own research simply because the stock went down. A decline to the average investor means that he made a mistake and had better sell before that mistake gets worse.
Many investors know the math that a 30% decline means that a stock had to increase roughly twice that much just to get back to breakeven. Supposedly that is hard. Really it is hard if you are not thorough before you do research. Louis Rukeyser in his book " How To Make Money In Wall Street " noted that the average investor spends more time buying a car than they do investing in stocks. Yet many put far more money into stocks. He is long gone. But I bet that relationship has not changed.
The problem is during a time like this, stock price movements can cost investors serious money as they constantly switch stocks into lower returns before finally giving up just before the rally starts. As so many authors have pointed out, this is the time to buy not sell.
Justin Mamus wrote the only book I have titled " When To Sell Stocks ". One of the more fascinating things pointed out by Louis Rukeyser many times is that you cannot make money in stocks unless you have both buying and selling stocks sufficiently mastered. Yet there are literally thousands of books on buying stocks. For some reason selling stocks is not nearly as popular even though selling stocks incorrectly regularly costs investors their profits and often more.
Warren Buffett has famously avoided that trap by supposedly never selling or rarely selling. The rest of us could learn a thing or two from that because Mr. Buffett has a tremendous public track record even though his company is far larger now than it was years ago.
What Buffett Sees In Occidental
Probably the most obvious thing that Warren Buffett likely sees in Occidental is the ability to retire the debt with cash flow under some stringent conditions (like lower commodity prices) with plenty left over or he would not be buying stock at the current prices.
So, while Mr. Market is fretting about lower prices, Warren Buffett obviously believes the stock is cheap even at lower commodity prices.
Antero Resources Liquids Macro Summary (Antero Resources March 2023, Investor Presentation)
This particular presentation by Antero Resources ( AR ) management is oriented more towards natural gas liquids. However, the oil market has similar arguments at the current time. That is especially true about the limited OPEC spare capacity noted above.
So many forget that the cure for low prices is low prices in a free market unless action is taken to fix that. So, if you do not want sky high oil prices when the current panic blows over, then action needs to be taken now. We generally rely on that messy marketplace to take care of such issues rather than do much in the way of government intervention to change the industry cycle.
Many of the CEOs that I follow with oil and gas believe that the industry is cheap at the current time. Many believe that it is so cheap that they are buying production rather than organically growing it. They then meet the market demand for a dividend while still growing the company. Probably the poster child for this strategy is Diamondback Energy ( FANG ).
So many wondered why oil and gas production was not growing when prices were higher. Those people now have an answer. The industry and the market often look ahead, and they appear to have foreseen a good chance of trouble that has now happened.
Yet in the same presentation and for at least the recent conference calls, management of Antero Resources expects commodity prices to be stronger later in the year. They are not the only ones in the industry by a longshot. Now timing could be off a few months one way or another. But they know this industry better than a lot of public commentators.
The Future
Occidental has long operated in the Permian before it was cool to be in the Permian. As a Permian operator, few have a presence of this company. The EOR operations and the unconventional operations make this company a major presence in the basin both now and for years to come. Warren Buffett is giving this operator some credit that has long gone to smaller companies.
"Buy Straw Hats In January" was my favorite Charles Allmon expression. He likewise passed on a few years ago. But the investment attitude shown by that expression is one of the hardest to execute. I have literally dozens of comments in my articles telling me that a downward moving stock price is evidence of a dog. No analysis needed (end of argument). No doubt those same commenters will be back after the stock market recovers to the tune of 100%.
One more Charles Allmon quote is relevant here. "The stock market is a store where no one is interested in the merchandise until it is marked up 50% to 200%". Along with him John Templeton, Peter Lynch, and many others stated to buy bargains. John Templeton went on "Wall Street Week With Louis Rukeyser" to note he bought Ford ( F ) in the $30s only to see it decline to roughly $11 two years later. He did not sell until he made something like 500% or so about five or six years after that. He had a similar story purchasing Exxon Mobil ( XOM ) in the thirties only to see the nearly 10% yield head to 13% as the stock declined.
One of the things every great investor stated is to sell when everyone else buys. Justin Mamus in his book noted above details that process. Nowhere in any one's book does it state to sell a stock just because it goes down. That means a lot of great investors have enough faith in their research to take an occasional loss. Rarely does the average investor learn from his mistakes. Yet to be an investor is to be a lifelong learner.
Warren Buffett has clearly improved over the years. The question is how many investors will learn from Warren purchasing Occidental now while many others run for the hills. One of the things about a declining stock is that after it declines (for example) 60%, any decline after that is relatively small. But it may not be small to you if you purchased when the stock was at that remaining 40% level. To you, another 4% drop from the original price is 10% of your investment. It could drop more.
Antero Resources Stock Price History And Key Valuation Measures (Seeking Alpha Website March 16, 2023)
Antero Resources was probably one of the more extreme examples of what can happen during a crisis. Large investors clearly wanted out because there was a warm winter and later covid. Even though natural gas prices had bottomed and actually begun to slowly creep back up, clearly other factors dominated. All kinds of investors pushed the stock under $1 even though the financial rating never changed significantly throughout this time period. There were negative watches as is typical for an industry downturn.
It took about a year before the stock slowly began its recovery. There really was not much interest in the stock until that recovery was well underway. It ran from a low of under $1 to a high price in excess of $40.
Warren Buffett clearly sees a chance to make some decent money. Maybe not as extreme as Antero Resources. But he would not get involved for a 20% gain because it is not worth the risk. One guidance on when to sell would be that another stock has at least 100% greater potential return. If Warren Buffett is buying, then I would think he sees that 100% plus more.
For further details see:
Occidental Petroleum: Cooler Heads Prevail