Many investors follow the buying and selling activity of Warren Buffett (Trades, Portfolio)'s conglomerate, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), closely.
The investments held by this company give us an insight into the corporations and businesses that the Oracle of Omaha wants to own. This is really the only way we can see how he is investing in any market environment.
Buffett does not have to report his personal trades and rarely talks about them. It's easy to understand why. If he were to reveal which stocks he is buying and selling personally, this could distort the market and lead to accusations of market manipulation. It may also make it difficult for him to buy and sell positions if everyone else is trying to do the same.
Since the beginning of his career, Buffett has tried to operate from a position of strength, which generally means flying under the radar while attempting to take advantage of opportunities the rest of the market is missing. That has not changed.
However, news does occasionally leak out about his individual trades. In 2015, it was revealed that the Oracle of Omaha had personally acquired two million shares in Seritage Growth Properties (SRG, Financial).
A troublesome investment
Since Buffett acquired the position, the stock has lost more than half of its value, excluding dividends. This is a cautionary tale of why investors should not always blindly follow billionaires and hedge fund managers into positions.
We know that Buffett bought Seritage in 2015, but he didn't present a detailed investment strategy to explain why. This means any investors who followed him into the position did not have a road map to guide them if something went wrong.
What's more, Buffett has a huge advantage over other investors in the form of Berkshire. I have previously written about how Buffett has been able to use the conglomerate's vast cash resources to offer loans to companies at favorable rates.
Unlike other equity, which Buffett will only make if he knows and understands the company well, loans do not require an in-depth understanding of the target business. Instead, all Buffett has to understand is whether or not the business will go under.
In 2018, when Seritage was dealing with some liquidity issues, a Berkshire subsidiary, Berkshire Hathaway Life Insurance Company of Nebraska, provided a five-year loan of $1.6 billion to help it refinance all of its other debt.
In the first half of 2020, the company amended this loan facility to allow it to defer interest payments if cash resources fell below a certain level. Clearly, Buffett believed in 2018 that the risk of Seritage going under was low, low enough to make this sizable loan.
In a way, the deal also helped support his own personal investment in the company. With Berkshire as a backer, Seritage has been able to navigate the turbulence caused by the pandemic. Buffett's conglomerate has always been a relatively understanding creditor, allowing borrowers headroom if they needed on financing facilities. Buffett has also made it clear that he won't pull the rug out from under borrowers if they run into trouble.
Many other creditors wouldn't be as understanding. If Berkshire hadn't stepped in in 2018 to help Seritage refinance, the company might have run into trouble in 2020. With Berkshire's backing, the business pulled through, potentially saving Buffett and other investors a significant loss.
The bottom line
The main takeaway from this case study is the fact that billionaires and hedge fund managers may often have an advantage over individual investors. Therefore, it is not always sensible to follow or clone their positions as they may be able to influence the outcomes. Buffett's agreements with Seritage illustrate this point.
