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At Berkshire Hathaway’s widely-followed annual meeting, super-investor Warren Buffett, Berkshire’s chairman and CEO, revealed a stunning fact that no one in the mainstream media is telling you about.
And given the recent popularity of this event held in Omaha, Nebraska, every year — heck, this year’s entire meeting, which is much like an investment carnival, was live-streamed by Yahoo Finance — it’s stunning to me that no one in the popular press has focused on what Warren had to say and on what it really means for you and your money.
If you are a frequent follower of Warren Buffett, (aka the Oracle of Omaha), you know that he consistently states that he’s not a big fan of holding cash. In fact, in a CNBC interview at this year’s meeting, he went so far as to proclaim, “I hate cash.”
Indeed, he addressed his disdain for cash in more detail in an annual Berkshire shareholder letter he penned several years ago. In that letter, he explained that because many retirement investors think that cash is safe and that stocks are risky, they put cash in their mattresses instead of buying equity in public companies.
He then goes on to opine that: “It really should be the other way around. Stocks have a long-running record of handily outperforming the major investment choices, including gold and bonds. But it’s cash that is the absolute loser, thanks to inflation, a relentless force that destroys purchasing power like rust gnawing away at an unpainted bridge.”
OK, I guess that makes sense because we all know that stocks have outperformed cash holdings over the long run. But the real issue here is: Real people, like you and I, live our lives in a series of short runs that over time make up our own individual long term.
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Here’s what I mean: During our lives, we have different cash needs that may or may not sequence perfectly with our own earning power, market valuations and overall economic conditions.
It’s great for an institutional investor like Warren Buffett to brush aside the need for cash holdings because he can take the long view. He’s talking about corporate money, which comes from a variety of sources.
On the other hand, when you and I need to pay for a new car, write a check for college tuition or fund our living expenses in retirement, we need cash on hand to do it. That’s why individual investors must be much more attuned with aligning their asset-allocation and cash needs with market conditions.
Simply put, you have to make sure that you are not buying high and selling low just because of your cash situation.
While I have a lot to say about the differences between individual investors and institutional investors as a result of my experiences on Wall Street — and, more importantly why they’re different — that’s a subject for a different day and possibly a future Money and Markets article.
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| Buffett disclosed that his company’s cash holdings could swell to as much as $150 billion over the next three years. |
For now, just know that there is a difference — a big difference — between your financial situation and Berkshire Hathaway’s.
Turning back to Warren and his comments, here’s how what he’s saying — and more importantly what he’s not saying — can help us.
On one hand, he’s essentially saying that cash is trash.
But on the other hand, look at this:
It shows that Berkshire’s cash hoard stood at about $80 billion at the end of 2016. What’s more, during the shareholder’s meeting and in media interviews afterward, Warren disclosed that his company’s cash holdings had increased to $90 billion and could swell to as much as $150 billion over the next three years if he doesn’t get busy and make some investments.
Astonishing for a man who doesn’t like cash!
But what’s even more stunning is how large Berkshire’s cash pile is when compared to the value of the company’s stock holdings. According to a chart based on Berkshire’s SEC filings maintained on the web by CNBC, the value of Berkshire’s stock portfolio is approximately $160 billion.
That means that, despite their chairman’s public proclamations about his disdain for cash, cash comprises more than one-third of Berkshire Hathaway’s investment portfolio.
Sure, the company’s holdings change frequently – and my math, based on CNBC information, may be off a bit – but based on my analysis of their public filings, Berkshire is holding a high percentage of cash no matter how you slice it.
Why the disconnect? What’s going on?
Look at the chart below and it will tell you why.
In a nutshell, this chart measures the overall valuation of the U.S. stock market by expressing total stock-market value as a percentage of U.S. GDP.
In fact, Buffett called it “probably the best single measure of where valuations stand at any given moment.” Since his statement, it’s become commonly referred to as the “Buffett Indicator.”
And what it’s currently telling us is that U.S. STOCKS ARE IN EXTREMELY OVERVALUED TERRITORY. Refer to my December 30 Money and Markets article where I explain this chart and how to interpret it in detail.
This means that Buffett, as the saying goes, “is stuck between a rock and a hard place.”
To invest Berkshire’s cash at reasonable valuation levels, he needs U.S. stock prices to decline significantly … Â but if that happens, the value of stocks in his company’s current portfolio declines substantially and Berkshire Hathaway’s stock price goes down too.
What’s more, a substantial stock-market decline could damage his reputation as one of the world’s greatest investors just as he is winding down his career.
That’s why he’s saying Berkshire may consider paying a cash dividend for the first time in its history. That way, he can relieve the pressure from the internal cash buildup while continuing to support his public statement in February that “we are not in bubble territory or anything of the sort” — despite what his self-proclaimed favorite valuation metric is saying.
On Wall Street, we call this behavior “talking your book,” which means expressing your opinions based on your portfolio holdings. Since Warren’s book is tilted heavily toward U.S. stocks, of course, he’s not going to publicly say that the stock market is overvalued.
Bottom line: As the Captain of the Safe Money ship, I like to follow my grandmother’s sage advice which was: “If you want the truth, watch what people do and not what they say.”
In this instance, Berkshire Hathaway’s large and growing cash hoard is telling us that now is not the time to be filling up our boots with risk. Specifically, my advice is that you keep your stock market hedges (TLT and GLD) on and your cash position high — just like the Oracle is doing in Omaha.
Best wishes,
Bill Hall
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Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
{ 12 comments }
When you say cash do you really mean underline cash or do you mean that he has it in some other form of liquid assets such as CDs etc. etc. Big difference if he’s earning interest on his so-called cash your comment thank you
Some really excellent observations. There may be other reasons for keeping cash in your mattress, and they don’t have much to do with investing. If you are concerned about a cash hungry government trying to stealing your money if it is in a bank or other institution, well that is a different basket of eggs.
Hey Warren,
If you really hate cash, I can think of 320 million citizens who would really appreciate a check for about $ 2500.00!
Sawbuck:
You are a looter.
db
Just a few thoughts on that stock market value to GDP ratio (and I’m not a perma-bull or arguing that the indicator is necessarily wrong). But could there could be a few mitigating factors to consider:
1/ Big US companies have been growing faster than the US economy for years due to their global exposure think Apple, Google, Amazon and some others. In other words globalisation should see big companies growing to a size that takes them far beyond their national footprint and therefore become larger compared to the country’s they’re based in.
2/ US money supply has certainly been growing faster than GDP for years as no doubt the stock market along with other capital markets has been absorbing it rather than causing inflation in the real economy
3/ On measures such as PE ratios US stocks are expensive, but not extreme as compared with the Millennium for instance and we don’t yet have the behaviours typically associated with bubble markets — though that could be the last and final stage of this bull market.
Any thoughts on those points?
The sly old fox Buffett is doing a sell job on all who will listen!
Watch what they do, not what they say is very good advice!
Thanks, Bill.
Warren may be sensing the possible impeachment of the President or the invoking of the 25th Amendment to remove a mentally impaired President. Either might lead to some distress in the equity markets.
MIKE…. Sorry it is too late for that.. Obo is finally out of office and receiving 400K a speech, on global warming while he consumes about 4,000 gallons of jet fuel creating a nice carbon foot print.
Bill: Great letter about Berkshire Hathaway. Many investors haven’t purchased it due to it’s not paying a dividend. Should investors reconsider buying Berkshire for possible good growth and dividends as occur’ed with Apple stock? Sure appreciate the great investment portfolio you publish.
Completely disagree with your interpretation of what Buffett was saying about his cash horde. He is interested in a new deal, not a stock purchase (as stock investing is a sideline for Berkshire). Also, no one of any financial sophistication would advocate not keeping enough assets in cash/cash equivalents to cover ongoing needs, including those unforeseen.
I really appreciate this insight. I have long known that with Buffet, you need to read between the lines. As you referred to it, he is one to “talk his book”. Unfortunately, we can’t all routinely sift through Berkshire’s financials to put truth to fiction. Given his cash position, in addition to his own lauded market indicator, it looks pretty clear that the Oracle is expecting a market correction.
Thank you again for the perspective!
Faaantastic! Buffett must have felt the boot to his rear