Warren Buffett.
Credit: Reuters File Photo
By Jonathan Levin
Everything in the world is relative, including Warren Buffett’s cash position.
After Berkshire Hathaway Inc’s third-quarter report on Saturday, investors and commentators made a lot of noise over the fact that Buffett’s cash hoard had ballooned to a new record of $157.2 billion, most of it in Treasury bills. For some, the development was a sign from the Oracle of Omaha himself that a global recession was nigh, with echoes of his cash hoarding before the financial crisis. For others, it suggested that the eminent 93-year-old investor had lost his knack for finding deals. In reality, it’s just Buffett being Buffett, exhibiting his usual restraint in a market without many bargains.
First, consider the cash pile itself. While Berkshire’s position in T-bills has indeed grown, so too has the rest of its portfolio. At about 15.4 per cent of total assets, cash and equivalents are just a hair above their 20-year average. The out-of-context focus on the “record” makes the situation sound much more extreme than it is. Today’s cash-to-assets ratio pales in comparison to the levels that prevailed before the financial crisis, which allowed Buffett to opportunistically scoop up legendary investments involving Goldman Sachs Group Inc., General Electric Co and Dow Chemical Co.
Nowadays, Berkshire hardly looks like a firm that’s bracing for Armageddon. In fact, it still has significantly more exposure to two consumer products companies (Apple Inc. and the Coca-Cola Co.) than it does to Treasury bills. That’s clearly not how I’d structure my portfolio if I had foreknowledge of a looming market implosion.
Second, recall that Buffett’s special sauce is his patience. He and his 99-year-old partner Charlie Munger made their fortunes by holding a lot of cash (sometimes a bit more, sometimes a bit less) and waiting for the chance to invest in high-quality brands at attractive prices. Occasionally, they’ve made lower-quality investments, too, albeit at very attractive prices, but the key has always been in maintaining self-restraint and the financial cushion to hold out for the right deals to come to them. That’s why it’s almost funny to see the periodic handwringing about the amount of cash on the balance sheet; it’s a cornerstone of their famous and often-emulated investment strategy.
It’s hard to see where Berkshire deals would come from today, however. In a now famous 2001 essay for Fortune Magazine, Buffett pointed out the ratio of total stock market value to the economy’s nominal value as an early indicator of overvaluation during the dot-com bubble. The so-called Buffett indicator is running well above its historic average (although it’s retreated significantly from its peak in late 2021.) What’s more, for the first time in more than 20 years, the trailing earnings yield on the S&P 500 Index is lower than the 3-month Treasury bill — an obvious sign that the risk-reward isn’t great in volatile equities.
Some doomsayers think the popular Buffett indicator and earnings yields relative to T-bills are warning us of an ongoing bubble that still needs to burst. Given the many pandemic distortions in the US economy and markets, I’m not so sure I read them in such a dire way — and I don’t think Buffett does either, though I haven’t had the chance to ask him. One thing’s for sure: These metrics aren’t signs that it’s time for investors to feast on deals. While some troubled assets (think: the KBW Regional Banking Index) have cheapened, it’s hardly clear that they’re trading at fire-sale prices given the underlying vulnerabilities.
The conventional wisdom is that the longer Berkshire waits, the more the pressure grows to deploy that money — but I’d beg to differ. Even in lower interest rate environments, Buffett and Munger have proved they were willing to be patient, so the two should be more than happy to take their time with T-bills paying over 5 per cent and with a whole lot less to prove to the world.
Here’s how Buffett put it at this year’s Berkshire shareholder meeting in May:
...the world is overwhelmingly short-term focused. And if you go to an investor relations call, they’re all trying to figure out how to fill out a sheet to show the earnings for the year. And the management is interested in feeding them expectations, so we’ll slightly be beaten.
I mean, that is a world that’s made to order for anybody that’s trying to think about what you do that should work over five, or ten, or 20 years. And I just think that I would love to be born today, and go out with not too much money, and hopefully turn it into a lot of money. And Charlie would too, actually.
Here’s the long and the short of it: There’s no need to overinterpret the modest growth of Berkshire’s cash balance, which exhibits about the same degree of caution that Buffett has brought to the company for the entire 21st century. Not even Buffett knows where the economy is heading, but he knows a lackluster value proposition when he sees one. So it’s pointless to spend down that money in a market with few fat pitches.