TIGER 21 Chairman on Buffett signaling ‘cash is king’ amid COVID-19 market volatility

Michael Sonnenfeldt joins Yahoo Finance Live to discuss the highlights from Berkshire Hathaway's annual shareholders meeting, the key takeaways from Warren Buffett, and where TIGER 21 members are looking in the market.

Video Transcript

JEN ROGERS: Of course, this weekend was the livestream, carried here on Yahoo Finance, of the Berkshire Hathaway annual meeting. And usually when we are in Omaha, Nebraska, we sit down and talk to Michael Sonnenfeldt, TIGER 21 chairman. He's there as well with some of his members.

So, Michael, the headline that's really come out of the meeting is on the airline stocks. And I want to know if, for you, that really is the biggest takeaway or if there's something else that we need to be paying attention to.

MICHAEL SONNENFELDT: So I think, you know, Warren talked about the S&P. And there was a question about whether-- why had Berkshire not beat it in 5 or 10-- and I think the question said 15 years. I think that was inaccurate. Berkshire has beaten it.

So he has this huge growth of people who have been with him many years who have had extraordinary returns but not in the last 10 years. And he's basically said as they get larger and larger, it's going to be harder and harder to beat the S&P and has even told his own estate not to stay in anything but the S&P. So I think you combine that and all the comments-- all the positives that are really cloaking his basically bearish short-term view. I think those were the big takeaways.

ANDY SERWER: Yeah, Michael, I mean, that just leads to my question, which was then why the heck should you own the stock, right? I mean, and that's sort of what that question was, but maybe you can answer it, or maybe you were going to say you shouldn't.

MICHAEL SONNENFELDT: Sure. So full disclosure, I own exactly one share of the stock. But the answer is that TIGER members have been debating between the S&P and Berkshire Hathaway. It is our largest nonindex holding in the top five outside of technology. So we have wide distribution.

And it's kind of like two race horses. Berkshire achieves its results with a large amount of cash and an unusual structure. And in 10 years, that has not outperformed the S&P. But you can imagine certain scenarios where the S&P will outperform-- where Berkshire might. But basically if you had to put $100 away for 30 years, you'd do well putting them either in Berkshire or the S&P or splitting it between the two.

You know, I was looking before. If you just look over 15 years, there's been a 2% differential, which adds up to a 30% value difference for Berkshire over the S&P, but not in the last 10 years. It's basically been a push.


JEN ROGERS: Michael, a real range of questions that Buffett fielded. And there were a couple on the insurance portfolio, and I want to got a listen to him talking about Geico.


WARREN BUFFETT: At Geico, we're the second-largest auto-insurance company. And different auto insurers are handling a sharing of the better experience with their policyholders in different ways. We-- our plan, we'll deliver back $2 and 1/2 billion roughly or so and recognizing the reduced frequency of accidents during this period. What we don't know is how long this will continue. I mean, people want to drive their cars still, but conditions have reduced that driving dramatically, obviously.

Now, we have instituted a program that runs saving people money for six months, and so far other people have largely been two months, but some of them have given a little more for those two months than we get per month. Our total is the greatest at $2 and 1/2 billion.

JEN ROGERS: So as with everything, it seems, in the time of coronavirus, there is good and then maybe not so good and bad. So people aren't driving as much and there's fewer accidents, but then Buffett also went on to say that if people lose their jobs, then they might give up insurance, and there will be more uninsured drivers on the road. He also talked about holding money back for litigation on different business stoppages as well.

How do you think we should be thinking about insurance overall? Like is part of--


JEN ROGERS: --why there's such a big cash pile because it's a question of what they're going to need?

MICHAEL SONNENFELDT: So you're at the-- you're at the heart of the question that we debate in our groups. We have 60 groups around the world, and one of the big topics is what does it mean that Buffett has this extraordinary insurance juggernaut? They're one of the great insurers in the world.

And while you talk about COVID, the same issue is starting to come with electrification of vehicles because with autonomous vehicles, you are going to have accidents going down, and they have-- they have been more nimble in repricing insurance to the risk.

He talked about some of those risks in other areas where they've done great. And he talks about the structure of Berkshire as being with insurance and energy and then all the rest of the companies and how they work together in a unique structure, but it still adds up to the fact that in 10 years they haven't been able to beat the S&P, although they have different engines driving, if you will, down parallel tracks.

So they have an extraordinary group of people. It's really amazing what they've done, and it's even more amazing-- we were in a group with members who used to be traders, and they were saying when you come out of a marketplace like in 2008 on the upside, the stock pickers couldn't beat the averages. There's something about a broad recovery.

We're not there yet. I think Buffett is saying we're going the other way, or at least we're stalled for a while. He can't put a number on when the airlines will get back, and he can't-- he even says his own stock at a much lower value provides no more value today than it did six months ago, which means all the underlying prospects of the endless number of companies they have are down as well. So it's a pretty bearish outlook that he's giving you, even though the insurance is clearly the crown jewel in their portfolio.

ANDY SERWER: Yeah, just to jump on that point, Michael, make no mistake about it. The insurance piece is at least one if not the key differentiating advantages that Warren Buffett has. And it's a very complicated business. It generates a tremendous amount of cash. And if you put those two things together, which is essentially his brain and Ajit Jain's brain together with the cash that it generates, there's really sort of no one else on the planet, no other entity that has those two advantages.

But I wanted to ask you, Michael, about, you know, where to from here and, of course, you know, this whole idea that they're looking for a whale. It's been that way forever. They're always looking for a whale, but they really need a whale. And then this whole-- I thought it was a fascinating point that Buffett made that the Fed acted too quickly and too strongly for anything to sort of come-- well up for him to buy. What do you make of that whole notion?

MICHAEL SONNENFELDT: Well, one of the members of TIGER who was in the small-cap area sent out an alert right after that saying short the banks. It's not just Berkshire Hathaway. If the Fed is crowding out the best opportunities by what they're doing, it's going to be tough for the whole banking sector to compete.

And on the other hand, Buffett went out of his way to congratulate the Fed on taking courageous moves. He really went out of his way on that. It was quite interesting how he did that.

So there's no question that the market is as strong as it is precisely because of the actions that the Fed took. You know, we're down-- I forget today, but as of Friday it was about 17% on the year or so. And in the last 20 years, the market has been down more than 40% four times, two of which have been more than 50%. So on a relative basis, we're only down about a third of these other four downturns. And yet when you look at it, the carnage of unemployment and business stoppages is much, much greater. There's such a disconnect that the only explanation for it is that the Fed has been flooding money into the system to try and keep it working.

And even Buffett mentioned that if there had been a functioning FDIC during the Depression, it might have lessened the impact there as well when, in fact, the market fell down 90%. And we're nowhere-- obviously we're nowhere near that yet.

RICK NEWMAN: Hey, Michael, Rick Newman. Warren Buffett sounds less bullish on America than in recent memory. Do you feel that way? Are you bearish on America?

MICHAEL SONNENFELDT: No, just the opposite. I happen to agree-- and our members, by the way, in our most recent asset allocation have a similar allocation in that over 50% of our assets are private equity and real estate, private real estate, and then another 25% in public real estate. So that's 75% of long-term risk-on assets.

But it can be true that if you have the greatest faith in America's long-term potential, the near term can still be pretty upsetting and pretty scary. And I think all that's happening is that the nature of the black swan, the dual black swan between the coronavirus and what happened with oil then precipitating the market decline is really unprecedented. So it can be true that you can have a long-term view. And as Buffett said, if you bought the stock, it's one thing. If you buy it on margin and expect to have a return soon, it's another.

Our members are seeing the asymmetry of the downside. We want to protect. We have large cash holdings. Most entrepreneurs learned how to weather through the storm. That's why they were successful, and he's doing the same. So

He's basically saying cash is king. Don't make any assumptions about normal value. When you see values that are so dramatically low, that's when he's going to take it, but he's not looking for a 5% or 10% discount.

I know in our own-- I was on a member call last week with a real-estate operator talking about industrial and retail and residential and the disasters there. But even there, he mentioned somebody who bought a mall. He was buying the mall for $0.10 on the dollar, and he was able to reconfigure it for $0.20. The owner lost 80% or 90%, but the buyer doubled his money. So you really need to have the expertise that a Buffett has at his scale or our members have at their scale.

JEN ROGERS: TIGER 21 chairman Michael Sonnenfeldt, great to see you. Hopefully we'll see you in person next year when the annual meeting rolls around again. Take care.

MICHAEL SONNENFELDT: Thanks so much. Bye-bye.