Whenever Warren Buffett does something big, it is worth taking notice.
And the world’s best investor has actually done a couple of big things – betting big on his own shares and also continuing to bet big on the US share market.
His investment vehicle Berkshire Hathaway has been busily buying back its own shares during the third quarter, to the tune of US$9 billion (A$12.4 billion), taking his total share buybacks for the year so far to US$16 billion (A$22 billion).
Earnings per share go up as cash pile is whittled down
That does several things at once – it automatically increases Berkshire’s financial measures such as earnings per share because the same earnings are spread across fewer shares, helping to keep the share price trending higher.
And it also soaks up some of the massive US$145.7 billion (A$200 billion) cash pile that Berkshire still keeps for a rainy day, although that is plenty for even a massive acquisition should one come Berkshire’s way, with banks ready and willing to lend even more if it is required.
Buffett doesn’t have to do research before buying back his own shares because he already knows the company backwards and is obviously confident about its growth prospects and thinks they are better value than other opportunities on the market at the moment.
Buffett buying up as other companies hoard cash
It is also a sign of Buffett’s famed counter-cyclical investment style with many other US companies halting their share buybacks so that they can preserve cash as the COVID-19 pandemic and the imminent change of power in the White House continue to cloud the outlook.
It has allowed Berkshire’s share price to rise faster in the third quarter than the overall market, which means that the early parts of the buyback have already earned a hefty return for remaining shareholders because the company bought back its own shares relatively cheaply.
Even though many of Berkshire’s business units have been struggling because of the effects of the pandemic, they are beginning to bounce back as the US recovery limps along.
Buying other shares as well
Berkshire has also been buying shares in other companies after famously jettisoning airline stocks at a loss earlier this year as the pandemic dramatically changed their fortunes.
The company bought US$4.79 billion (A$6.6 billion) of other stocks in the third quarter using the usual process of buying straw hats in winter as pockets of value emerged.
All told, the Buffett approach has continued to kick goals with the recent market rally pushing up the value of the company’s investments by an impressive US$25 billion (A$34.3 billion).
While Buffett usually keeps his moves secret until they have to be revealed, it is a safe bet to assume that he is now cautiously confident that the continuing monetary policy stimulus from the US Federal Reserve will continue to push up share prices, hopefully helped by greater control over the COVID-19 pandemic and particularly the development and implementation of an effective vaccine.