Warren Buffett has really earned his reputation as the world’s best investor so it is always worth keeping an eye on what the Oracle of Omaha is up to.
At the moment he is being exceptionally cautious, building up a mammoth pile of cash that, according to Bloomberg estimates, has now reached a staggering US$122 billion (A$179 billion).
Anyone who has followed Buffett over the years would know that this is a fairly unusual thing for him to do – Buffett hates sitting on cash for long periods of time, especially when it is earning tiny amounts of interest given current low rates.
He always keeps enough cash and lines of credit ready to grab a big opportunity should it come his way, but he rarely sits on piles of cash as massive as this.
Two reasons for Buffett’s cash pile
When he does, it is usually for two related reasons – he is concerned that shares are too expensive so there is a lack of companies cheap enough to buy shares in or he believes that the market is set for a fall so a large amount of cash will be essential.
As it turns out, it seems that Buffett has once again been proved to be right with some fairly sizeable market falls happening in the past week just after the large amounts of cash sitting on the balance sheet of Buffett’s company Berkshire Hathaway were being noticed.
So far, the falls have not been large or sustained enough for Buffett to be stepping up to snap up some bargains but they are an indication that this is not a bad sort of market in which to hold a large pile of cash.
Chance to lessen capital losses and increase options
That stance of holding a large cash stash reduces the potential for capital losses compared to the situation if a higher percentage of assets was holding shares and it also increases the options should a protracted or dislocating market fall happen.
Buffett hasn’t just been letting the cash pile up – he has been selling more shares than he has been buying to the tune of US$1 billion ($A1.48 billion) over the past quarter.
Last year, he kept buying into the rallying share market while this year he has been prepared to take some profits off the table and remain watchful.
Patience is a virtue
Famously, Buffett is extremely patient in waiting for opportunities and apart from building up existing stakes in companies such as Apple he hasn’t really bought any new companies of any size for a couple of years.
Buffett hasn’t even been buying as many shares in his own company as he has in the past, with share buybacks being slowed down.
This may be an indication that Buffett is not as confident in the durability of the current protracted bull market in shares, even a carefully curated collection such as that owned by his own company.
What the massive cash pile does show is that the collection of Buffett companies throw off a tremendous amount of cash, which quickly mounds up if it is not re-deployed
That is why Berkshire Hathaway has not been one of the most profitable or spectacular of companies to buy in recent years but it has been a fantastic performer when times get tough.
When times get tough, the cash keeps flowing
That is when Buffett is left as the person struggling companies come cap in hand to carrying stupendous deals – literally the last man standing in the market with a pile of money.
Not only that but Berkshire Hathaway’s holdings in mature companies continue to throw off plenty of cash, even if the share market goes off the boil or even plunges.
That is a great example of one of Buffett’s excellent quotes – “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
When the market turns sour, Berkshire Hathaway’s holdings will continue paying generous dividends which, combined with the massive cash holdings, will put Buffett in the box seat to grab the great opportunities that a suddenly tough market can throw up.
Whether it be suddenly distressed banks, capital starved insurance companies or struggling technology companies, the patient Buffett with his self-generating mountain of cash is sure to be in the box seat to grab any market opportunity.
And you don’t need to be a billionaire like Buffett to learn from the master.
The past week’s rapid market fluctuations show that this is not a bad time to be mirroring Buffett and keeping a larger than usual amount of cash sitting on the sidelines.