Most British schoolchildren will have some understanding of the Great Depression by reading Of Mice and Men, in which George and Lennie’s struggle to escape the drudgery of their life as ranch hands acts as a metaphor for everyone’s daily struggle for existence. While Warren Buffett (born 1930) may not remember the full extent of the Depression, it is certainly obvious that some of his earliest money-making ventures bear the stamp of those troubled economic times. According to his biography, “Warren was so desperate to make money that in 1938, in the sweltering summer heat of Nebraska, he walked miles to the racetrack where he spent hours on his hands and knees scouring the sawdust-covered floors for discarded racing stubs, hoping to find a winning ticket.”
While an endearingly pitiable anecdote, it does also say something about Berkshire Hathaway’s (US:BRK.B) subsequent approach to investing in the US stock market, which encompasses both the search for unloved gems and unbeatable brands at reasonable prices. While Alex Newman smartly dissected Berkshire’s annual jamboree recently, from an investor’s point of view it is worth analysing Berkshire’s individual purchases and figuring whether there are other opportunities available that might mirror their fundamentals, particularly now that the US market is starting to correct heavily.
In the current climate, it is worth remembering that companies are dealing with a combination of unprecedented inflation in input costs, combined with uncertainties over their supply chains. So Buffett has gone with investments that he understands, and which can deliver a safe margin of income over the cost of inflation that all investors are currently hunting for. Berkshire took a six-year pause before diving into the market earlier this year and buying Alleghany (US:Y) outright, alongside a large stake in printer manufacturer and software company Hewlett Packard (US:HPE). Setting aside our own US value portfolio this time, analysing both of those purchases in detail can produce an insight into Buffett’s thinking and the state of the US market as a whole.