Is Warren Buffett Expecting a Retest of March 23 Lows?

I don’t remember a time when Warren Buffett exhibited such a cautious tone during a period of market turmoil.

Buffett’s mantra is to be greedy while others are fearful (and fearful while others are greedy). However, during Berkshire Hathaway‘s 2020 annual shareholders meeting, he did not sound greedy in the slightest.

“We have not done anything, because we don’t see anything that attractive to do,” said Buffett on Berkshire’s lack of buying activity.

Warren Buffett isn’t swinging for the fences

Looking back, the market threw some pretty compelling pitches in March and April, but Buffett refused to swing and risk striking out. He sure missed out on a glorious April rally, which proved to be the best month for stocks in decades.

Buffett was content with eliminating his most “at-risk” positions, including airlines, amid tremendous coronavirus-induced uncertainties, rather than plowing Berkshire’s mountain of cash (which has since swelled to US$137 billion) into battered stocks.

Such a lack of buying activity from Buffett and Berkshire makes me wonder: is the stock market headed for an imminent retest of the March 23 lows? The TSX Index and S&P 500 plunged by approximately 38% and 34% from peak to trough.

Warren Buffett: actions speak louder than words

As economies around the world look to re-open for the summer, it seems like the darkest days of the coronavirus are in the rear-view mirror. But I believe investors should heed Buffett’s implicit warning. The Oracle of Omaha had a lot to share with investors on Saturday, but I believe his actions speak louder than words. As he was a net seller in April, I think investors should brace themselves for what could be another year of tremendous uncertainty.

Buffett may not be warning of another market crash, but he noted that the “markets can do anything” while acknowledging he has no idea what’s going to happen next. Berkshire’s US$137 billion cash pile seemed like a growing problem given rock-bottom interest rates. Still, Warren Buffett noted that it wasn’t that significant considering “worst-case possibilities” that could result in the coronavirus era.

The Sage of Omaha didn’t want to scare investors; rather, he likely wanted them to acknowledge the new slate of risks brought forth by the coronavirus and to be careful with putting money to work in an era where the lines between investment and speculation have been blurred.

Will stocks retest their March 23 lows?

It’s possible that stock markets could revisit the lows seen on March 23. Many beginner investors who’ve subscribed to the ‘V-shaped recovery prediction’ could easily be left holding the bag if they have sacrificed their liquidity positions to chase this market.

Buffett’s actions are suggestive of a highly unfavourable risk/reward trade-off. Stocks at ground zero of the crisis, such as Air Canada, could lead the next downward charge and hurt those who’ve bought a full position at one price rather than opting to dollar-cost-average over time. I had suggested investors do this with the name, which is going to be a massive mover over the next few years.

Foolish takeaway

If you lack liquidity, it can’t hurt to take profit in some of your cyclical names on the market rally.

While a stock like Air Canada could double or triple over a short timeframe, it could easily lose 90% of its value in a worst-case scenario. Consider what would happen if the pandemic were to drag on for years, and we experienced intermittent lockdowns and prolonged travel restrictions.

In any case, investors should only bet on such ‘all-or-nothing’ plays if the rest of their portfolios are sufficiently defensive.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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