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Buffett makes his first move in the coronavirus bear market

The Motley Fool logo The Motley Fool 4/1/2020 Dan Caplinger

The stock market has fallen sharply because of the coronavirus pandemic, and value investors are licking their lips at all the opportunities they suddenly have to pick up stocks of their favorite companies at bargain prices. As the quintessential value investor, Warren Buffett has to feel like a kid in a candy store -- or like something reminiscent of a more colorful metaphor the Berkshire Hathaway CEO made in the late 1970s.

We won't get a chance to see the moves that Buffett has made with Berkshire's stock portfolio until the insurance giant files its quarterly disclosure with the U.S. Securities and Exchange Commission, which likely won't come before mid-May. However, we've already gotten one hint about what Berkshire's doing during the coronavirus bear market, and it shows just how important Buffett thinks it is to have as much ammunition as possible to take advantage of great investment opportunities as they arise.

You can't ever have too much cash

On March 25, Berkshire Hathaway filed a prospectus with the SEC to sell senior notes into the bond market. Many of the details weren't yet established, but the draft indicates that the Berkshire debt will be denominated in Japanese yen. Berkshire indicated that the proceeds from the sale will be used for "general corporate purposes" -- the default catch-all category that most companies use when they raise capital by selling bonds or stock.

The draft prospectus also lacks both a fixed maturity date and the interest rate on the yen-denominated notes. However, looking at the Japanese bond market right now, interest rates are negative on two-year and five-year government debt, and right at 0% for the 10-year Japanese government bond.

Related video: Buffett likely eyeing banks as coronavirus ravages economy (provided by Fox Business)

Following up on success

It's likely that Buffett is following the same strategy he used to raise money in the European bond markets recently. Back in late February, Berkshire raised 1 billion euros by selling five-year notes. Thanks to negative interest rates in the European bond market, Berkshire was able to get investors to lend it money at a 0% interest rate -- essentially securing free financing.

Having free money is always a good thing in Buffett's eyes, but doing so through bonds denominated in euros also suggested to some investors that the Berkshire CEO might look to make acquisitions of promising companies in overseas markets. The same could hold true for adding some Japanese yen to Berkshire's stockpile of cash.

A billion here, a billion there

It might seem odd for Berkshire to raise even more cash, given just how much it has on hand already. Coming into 2020, Berkshire had $128 billion in cash and short-term investments on its balance sheet. Many of those following the insurance giant had become critical of Buffett's stinginess, noting how badly Berkshire's stock had lagged the overall market during 2019's huge bull run.

Yet Berkshire hasn't been afraid to incur debt when it's able to get such attractive financing terms. In the long run, Buffett figures that he'll be able to get a better return out of that cash than 0%. And while 1 billion euros, 100 billion yen, or $1 billion won't necessarily make a huge difference given Berkshire's size, every little bit will help add to the Buffett-led company's performance.

Buffett's attitude toward cash stands in stark contrast to what some other companies are facing. For instance, Boeing has aggressively boosted its dividend and made stock buybacks in recent years, yet it now faces a liquidity crunch as its revenue sources dry up and it faces production halts due to the coronavirus outbreak. Boeing has drawn down credit facilities and has thus far avoided taking money from the U.S. government, but its stock has plunged as the aerospace giant faces the biggest disruptions to its business ever. Berkshire wants to be the company extending cash support to such companies -- not the one needing help.

Buffett keeps looking at the big picture

Warren Buffett has been through many bear markets before, and he's demonstrated an uncanny ability to keep his cool and find good deals when others are panicking. As interesting as it'll be to see whether he adds some new stocks to his investment portfolio, knowing that Buffett's raising more money to make as many smart investments as he can is reassuring to his shareholders.

Dan Caplinger owns shares of Berkshire Hathaway (B shares) and Boeing. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) 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 June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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