It has to be a good sign that the Oracle of Omaha spent $10 billion in July
Remember not so long ago (like the end of 2019) when Warren Buffett was sitting on $128 billion in cash and was considered completely out of touch? A has-been?
Splashed across headlines were the words of David Rolfe, a longtime shareholder of Berkshire Hathaway and the chief investment officer at Wedgewood Partners. Mr. Rolfe told his clients that he sold the firm’s stake in Berkshire after decades of being a shareholder, because of his frustration with Buffet’s huge cash position:
“Warren Buffett’s cash hoard of +$125 billion continues to be a considerable impediment of growth, rather than our previous hard expectation of a valuable call option on opportunity in the hands of one of the most elite capital allocators extant.”
Rolfe and other Warren critics pointed to this fact to support their case: Berkshire’s cash went from about $23 billion in 2009 to $128 billion in 2019. In other words, Warren had increased his cash position by 6- times during the longest bull market on record.
Oh, and in case you’re wondering, by the end of the first quarter of 2020, Warren’s cash position was $137 billion.
A $10 Billion Buying Spree
But in just the first three weeks of July, Warren spent over $10 billion of Berkshire’s cash stockpile:
- During the first week of July, Berkshire Hathaway announced that it had acquired natural gas transmission pipelines and storage assets from Dominion Energy for about $9.7 billion.
- During the last week of July, it was revealed through a Securities and Exchange Commission filing that Buffett bought an additional 33.9 million shares of Bank of America at a total cost of just over $813 million. That means that Warren’s company now owns about 988 million shares, which is over 11% of all of Bank of America’s outstanding shares and makes Bank of America Warren’s second largest holding behind Apple.
It’s Been Almost 4 1⁄2 Years
In case you’re wondering if David Rolfe had a point, consider the fact that Warren has not made an acquisition of any size since January of 2016, when it acquired Precision Castparts. In case you don’t know, Precision Castparts makes “structural investment castings, forged components, and airfoil castings for aircraft engines and industrial gas turbines.”
So why has it taken Buffett so long to deploy his company’s war chest? In a nutshell, Buffett is a value investor. A bargain hunter, he searches for companies that are valuable but not recognized as being valuable by most other buyers. Thus, he can buy a company when its stock price is unreasonably low. And to do that, one has to have cash on hand.
Buffett’s #1 Rule
As one of the world’s greatest stock market investors of all time, Buffett has repeatedly said he has one key rule when investing: “Never lose money.”
Has the Oracle of Omaha ever lost money? Yes. But his losses have been small and infrequent compared with his many large, frequent and long-lasting victories – especially when one views his record over the past 55 years.
According to Berkshire Hathaway's 2019 Annual Report, Warren has guided Berkshire Hathaway to an average annual return of 20.3% over the past 55 years. That compares to a 10% compound annual return for the S&P 500, including dividends, over the same time frame.
And to show how much a difference really exists between Berkshire’s performance versus the S&P 500 over the past 55 years, consider this:
- Berkshire Hathaway's stock has outperformed the benchmark index by more than 2,700,000% since 1965.
Buffett in His Own Words
The value investor in Warren would rather hoard cash instead of spend money on speculative ideas. And Buffett and his team have just not recently seen many ideas that have met the Berkshire criteria. In his own words from the most recent annual letter to Berkshire Hathaway shareholders:
“Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.
In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.”
All Investors Should Hold Cash
When markets drop, there is a lot of chatter about how much cash an investor should maintain. The fact is, an allocation to cash is an important part of every investor’s portfolio.
But there are reasons to have cash beyond limiting risk. Cash can allow investors to invest at opportune times.
As the Oracle of Omaha famously said: “Be fearful when others are greedy and greedy when others are fearful.”
When others are fearful (when the markets or a company’s stock price are falling), the time might be a wonderful buying opportunity.
But to act on that opportunity, you need cash.
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