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Warren Buffett Shuns Stocks And Hoards Cash (#GotBitcoin?)

Buffett Steers Clear of Buying Stocks. Warren Buffett Shuns Stocks And Hoards Cash (#GotBitcoin?)

With stocks at record highs, Berkshire Hathaway Inc. sold $1 billion more worth of stocks than it bought last quarter, its biggest net selling since the end of 2017.

Berkshire’s total return has trailed the S&P 500 over the last five, 10 and 15 years. That’s raised questions of whether Berkshire has grown too large to generate excess returns, and whether the cash would be better off returned to shareholders than left for his eventual successor to pursue a major deal.

Still, investors aren’t rewarding Berkshire for its stock bets paying off. While the S&P 500 has surged 17% this year, Berkshire’s Class A shares are exactly unchanged.

Berkshire’s Cash Pile Hits A Record

Warren Buffett’s distaste for overpaying is winning out over his frustration with sitting on a lot of cash.

Buffett spent last year building a massive stake in Apple Inc. and pouring billions into investments in the biggest U.S. banks. This year’s rally hasn’t drawn him in.

Buffett has previously dealt with the issue of cash piling up as he waits to strike, but never at this size. He hasn’t had a major acquisition in several years and has even pulled back on one of his newer ways to deploy cash, slowing down repurchases of Berkshire’s own stock in the second quarter. The result was that the company’s cash hoard — a major focus for investors in recent years — surged to a record $122 billion.

“It would be hard to look at the cash balance and their uses of cash in recent quarters and not be disappointed that they haven’t bought any companies, they haven’t bought much stock, and they haven’t bought back a lot of their own stock,” Jim Shanahan, an analyst at Edward Jones, said in a phone interview Saturday.

The growing cash pile is a reflection of the strength of the operating businesses that Buffett has assembled under one roof, and allows the billionaire investor flexibility to move quickly when big deals emerge. But he has acknowledged that having more than $100 billion earn little return for several years weighs on the company’s growth.

Buffett, 88, earned his legendary status by consistently outperforming the broader market.

Buffett has tried to get ahead of those concerns, spending his last few annual meetings and letters to shareholders extolling the value of keeping Berkshire together as a conglomerate and maintaining the company’s status as the first call for unique opportunities.

“Berkshire has been set up to be countercyclical, to have a war chest that can take advantage of significant dislocations in the market,” said Richard Cook, who oversees $330 million including Berkshire shares at Cook & Bynum Capital Management.

Buffett’s been here before. In his 1998 letter to investors, he lamented $15 billion in cash that was burning a hole in his pocket with “nothing on the horizon” in terms of good acquisitions or large equity bets. Months later, while dot-com companies were the rage and Berkshire’s stock was slipping, he bought a majority stake in power utility MidAmerican Energy.

That deal became the building block for the energy business that he now refers to as one of the two “redwoods” in the most valuable part of Berkshire’s forest. It also delivered the executive — Greg Abel — who many consider the front-runner to be his successor.

Buffett once again confronted a record cash pile of $43 billion at the end of 2004 after saying he struck out on several multi-billion dollar acquisitions. That time, the level stayed relatively consistent until 2008, when financial markets fell into disarray and Berkshire went to work, lending billions to Goldman Sachs Group Inc. and General Electric Co.

Now, the question for investors is how long is Buffett willing to wait to find reasonably priced opportunities. After holding onto more than $100 billion of cash since the end of 2017, he pulled the trigger on more share repurchases last year, a route he had avoided over Berkshire’s history. While he considered using buybacks in 2000 when Berkshire’s Class A stock dipped below $45,000, he eventually delayed any move.

“Long-term, just trusting them has really proven to be the right strategy,” Paul Lountzis, president of Lountzis Asset Management which oversees more than $200 million including investments in Berkshire stock. “Very few people would have the courage as CEOs of companies to sit around and be patient like they are. He can afford to do it based on his track record.”

Some of the cash pile is set to be put to work soon. Berkshire agreed to inject $10 billion of preferred equity in Occidental Petroleum Corp. to help finance an acquisition of Anadarko Petroleum Corp., a deal that will be completed if Anadarko shareholders approve the merger later this month.

Last year, Buffett said prices for deals were too high for his liking, so he spent more than $15 billion on shares of Apple. He also bulked up on banks and airlines, but the stakes in many of those companies are now near the 10% ownership threshold that he’s said he prefers not to cross. He even passed that level with his Bank of America Corp. stake last month.

While Buffett’s preference in recent years has been to acquire operating companies, his increased stakes in big public companies have helped him trim the cash level, Lountzis said.

“If he had not done that, the amount of cash on the books would just be frightening,” Lountzis said.

Berkshire’s $400 million of buybacks in the quarter was down from $1.7 billion in the first three months of the year. That total fell short of the $1.5 billion expected by Barclays Plc analysts. Berkshire’s board changed its buyback policy last year as another way to deploy the mammoth cash pile, but Buffett has kept buybacks relatively limited, only repurchasing a total of $3.4 billion since the policy tweak.

JPMorgan Chase & Co., the closest financial firm to Berkshire in market value, has bought back about $20 billion in that time.

The stock market’s march higher is limiting Buffett’s opportunities, but it has pushed his stock portfolio above $200 billion in value and driven higher earnings. New accounting rules cause unrealized gains to be included in profit, so the company’s $7.9 billion in investment gains drove net income to a 17% jump.

There are other tangible benefits to the company of higher markets, beyond the gains on its stock portfolio. Berkshire had almost $1 billion in gains in the first half of 2019 on put options it wrote on several equity indexes more than a decade ago, almost half of which expire this year.

Updated: 8-8-2021

Warren Buffett’s Cash Trap Can Snare Big Tech, Too

The Berkshire Hathaway CEO has more cash than he knows what to do with. But Apple, Amazon and other tech giants face a similar dilemma.

Jeff Bezos, since stepping away from Inc., has become the latest billionaire to head to space. Meanwhile, Facebook Inc.’s Mark Zuckerberg is eyeing life in the metaverse. But don’t expect to see Warren Buffett riding on the next rocket ship for his 91st birthday this month or talking up virtual dimensions in Berkshire Hathaway Inc.’s earnings report Saturday.

Unlike some of his ultra-wealthy peers, Buffett still prefers the nuts-and-bolts businesses of Planet Earth, such as keeping people’s lights on and delivering goods by freight train. That old-fashioned mind-set is why Berkshire’s market value hasn’t taken the same rocket ride as Amazon or Facebook, even though its operating earnings are much the same.

With Buffett hoarding more than $100 billion of cash at Berkshire the last few years, the perception is that the investing icon has lost his touch in a technology-driven economy that would seem to be full of investment opportunities.

But even as Buffett is criticized for that cash stockpile, it actually puts him in quite good company. Amazon — now led by CEO Andy Jassy — and Zuckerberg’s Facebook are each sitting on a heap of cash, too, as are Tim Cook at Apple Inc., Sundar Pichai at Google’s parent Alphabet Inc. and Satya Nadella at Microsoft Corp. Other than Berkshire, these are the most cash-rich companies in America and the most valuable.
The Vault

Much like Warren Buffett’s Berkshire, U.S. tech giants have plenty of cash tucked away. Can they spend it without regulators impeding them?

Berkshire’s balance sheet was once a playground for Buffett and his followers, who would study the bread crumbs in his annual letter for hints about the next big acquisition.

Lately, though, his followers have given up on guessing because Buffett seems to think anything worth buying is too expensive or risky now. (It doesn’t help that his most recent big acquisition, the $37 billion deal for Precision Castparts five years ago, resulted in a writedown.) Without the splashy dealmaking investors had come to expect from Buffett, there’s little for them to get excited about, regardless of how much money Berkshire earns.

As it gets set to report another unsung quarter of results Saturday, it could serve as a word of caution to the tech visionaries: There’s a downside to CEOs encouraging cults around their own investing genius that can take the focus off of the business’s profitability and durability.

Buffett has basked in the personal limelight throughout his five decades building Berkshire, as Bezos did while at Amazon’s helm and Tesla Inc.’s Elon Musk is doing now. But younger investors aren’t as enthralled with Buffett or his value-investing wisdom, and that’s held back Berkshire’s stock price.

What they’re missing is that Buffett built this awe-inspiring collection of engines that take turns picking up the slack when another stalls out. It’s perhaps the only conglomerate that works exactly as intended. And especially now, its results can provide a scenic tour of the U.S. economy as each industry and state tries to navigate its way out of the pandemic.

Still, every quarter investors obsess over the cash figure, which was $145 billion at the end of March. The only way Buffett seems to be spending it these days is through share buybacks because Berkshire has been a net seller of stocks and an M&A spectator for much of the past year. Later this month, we’ll learn what if any equity stakes he took during the period. (Notably, tech investments are a part of the portfolio now, including a large stake in Apple.)

Buffett’s primary reason for not spending Berkshire’s cash is much different from what may be holding back the Cook and Zuckerberg cohort, a less price-sensitive crew. Any big acquisitions for them are at least temporarily off limits because antitrust regulators under the Biden administration and an expanding group of lawmakers have essentially said: “Don’t you dare.” That regulatory heat isn’t entirely directed at tech companies — it recently torched one of Berkshire’s deals, too. But it’s clear who government officials are primarily targeting.

It leaves everyone else to wonder what on Earth — or beyond — Big Tech will do with all that cash. And no one is more afraid of the answer than the businesses that sit in adjacent industries such as internet providers, streaming-video services and even companies in health care. That said, with a more limited ability to acquire formidable upstarts and neutralize competitive threats, Big Tech is left to see how it fares among an investor base that it drove to be preoccupied with revenue growth.

Shares of Amazon have already begun to retreat from their vaunted status, as Jassy grapples with a slowdown in e-commerce sales and a more competitive cloud-services landscape. Apple’s results last week were overshadowed by worsening supply constraints that are affecting the iPhone and iPad.

These tech companies can at least plow money into research and development of new products that may have a shot at becoming their next big thing. That’s something Berkshire can’t do. But Buffett does have the benefit of a long memory that it behooves hotshot CEOs like Zuckerberg to study.

At Berkshire’s May shareholder meeting — which because of Covid-19 was reduced from a celebratory festival into an online webinar — Buffett kicked things off by showing a list of the 20 most valuable companies in the world in 1989. None of them still held that status in 2021. “1989 was not the dark ages,” Buffett told his viewers. “We were just as sure of ourselves as investors in 1989 as we are today. But the world can change in very, very dramatic ways.”

It may remain one of Buffett’s most memorable lessons. Even as tech company after tech company has joined the $1 trillion and then $2 trillion market-cap club during the pandemic, they all have something in common with Buffett: more cash than they know what to do with. It’s a good problem to have until it isn’t.

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