Many market strategists forget that the famous entrepreneur has enough patience to wait until he “smells” the right trades
Everything in the world is relative, including Warren Buffett’s money position.
After Berkshire Hathaway Inc.’s quarterly report on Saturday, investors and commentators made a lot of noise about the fact that Buffett’s cash holdings rose to a new record of $157.2 billion, most of which is “maturating” in Treasury bills. . For some, this development is a sign from the Oracle of Omaha himself that a global recession is approaching, especially for those who remember how Buffett was hoarding money before the financial crisis, writes Bloomberg.
For others, it suggests that the legendary 93-year-old investor has lost his ability to “sniff out” deals. In reality, Buffett is just Buffett exercising his usual restraint in a market without many trades.
First, consider the pile of money itself. While Berkshire’s position in Treasuries has indeed grown, so has the rest of the group’s portfolio. At about 15.4% of total assets, cash and cash equivalents are just a hair above the 20-year average. The out-of-context focus on the “record” makes the situation sound far more extreme than it is. Today’s cash-to-asset ratio pales in comparison to the levels that prevailed before the financial crisis, which allowed Buffett to opportunistically scoop up legendary investments that included Goldman Sachs Group Inc., General Electric Co. and Dow Chemical Co.
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These days, Berkshire hardly looks like a company preparing for Armageddon. In fact, it still has significantly more exposure to two consumer products companies (Apple Inc. and Coca-Cola Co.) than to Treasuries. Obviously, it is not appropriate to structure the portfolio in this way if we have a premonition of a looming market implosion.
Second, remember that Buffett’s special trait is his patience. He and his 99-year-old partner, Charlie Munger, built their wealth by holding a lot of money (sometimes a little more, sometimes a little less) and waiting for the chance to invest in high-quality brands at attractive prices. Sometimes they have also made lower quality investments, albeit at very attractive prices, but the key has always been to maintain self-restraint and the financial cushion to hold out for the right deals to get there. That’s why it’s almost funny to see the periodic nervous finger-tapping about the amount of cash on the balance sheet; it is a cornerstone of their famous and often imitated investment strategy.
It’s hard to see where Berkshire’s trades would come from today, though. In a now famous 2001 essay for Fortune magazine, Buffett pointed to the ratio of the total value of the stock market to the nominal value of the economy as an early indicator of overvaluation during the dot-com bubble. The so-called Buffett indicator is moving well above its historical average (although it has retreated significantly from its peak in late 2021.) What’s more, for the first time in more than 20 years, the S&P 500’s earnings yield is more lower than the yield on 3-month government bonds – a clear sign that the risk-reward ratio is not great for volatile stocks.
Some prophets believe that the popular Buffett indicator and the earnings yield relative to Treasuries are warning us of an ongoing bubble that is about to burst. Given the many pandemic distortions in the U.S. economy and markets, it’s not at all certain that the data should be read in such a bleak way — and Buffett probably doesn’t either.
One thing is certain: these indicators are not signs that it is time for investors to feast on deals. While some distressed assets (think: the KBW Regional Banking Index) have eased, it’s hardly clear they’re trading at sell-off prices given the underlying vulnerabilities.
It’s an open secret that the longer Berkshire waits, the more the pressure grows to deploy that cash — but is it? Even in a lower-interest-rate environment, Buffett and Munger have proven they’re willing to be patient, so the two should be more than happy to bide their time on Treasuries yielding more than 5%.
In short: there’s no need to over-interpret the modest growth in Berkshire’s cash balance, which shows about the same degree of caution that Buffett has brought to the company throughout the 21st century. Even Buffett doesn’t know where the economy is headed, but he can recognize a murky value proposition when he sees one.
2023-11-07 20:05:00
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