What can we learn from Warren Buffett, or Warren chooses cash over bonds
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)
is sitting on $50 billion which is a lot of cash to say the least.
That money pile could buy a lot of businesses. He
could go out and purchase a few really good companies, outright. But he's not buying much of anything. He is not
finding much value in the market. He perhaps has not felt there has been
much value in this market for a few years running.
As many of us know, BRK has not
beat the markets over the last 5 years, and if one is not fully invested
in the market (NYSEARCA:SPY) they stand the chance of underperforming that market due to the under performance of asset classes such as cash and bonds.
And Warren has a much more sophisticated take on cash than what appears on the folksy surface.
This according to Alice Schroeder, his official biographer. She wrote Snowball: Warren Buffett and the Business of Life.
Mr. Buffett, the world's most successful (and richest) value investor, is sitting on almost $41-billion (U.S.) of cash at his Berkshire Hathaway holding company, the most in a year. Partly, that heap of greenbacks is a safety blanket. But it's something more. As with most matters Buffett, the strategy is more complicated than it looks.
Ms. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates...
He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.
She states Warren weighs the risks and returns on that option and does
the math. It is statistically-based and sound, of course, we are talking
about Warren Buffett here. When talking to his investors and the
general investing populace he will simplify the message and send the
message that cash provides opportunities to buy stuff when the
opportunity presents itself.
Benjamin Graham demonstrated in The Intelligent Investor that you can
purchase a great company with great prospects; even a company that
delivers on all of its potential, and still have it turn out to be a
very bad investment. Mr. Graham described it as purchasing without a
margin of safety. Today, Mr. Buffett is largely not finding his
teacher's margin of safety. Perhaps we can go as far to suggest that
even the wonderful dividend payers that BRK holds are not a good
investment at today's prices.
For Mr. Buffett, sitting on piles of cash that is earning next to
nothing is a better investment that common stocks. That should give most
investors reason to pause. Should we not listen to the world's most
successful investor? There were many times when the investment world has
thought that Mr. Buffett had got it wrong. Mr. Buffett has always proved them wrong. It does not pay to ignore the Oracle, or count out his investment acumen. Warren Buffett is not the world's greatest stock picker, Warren Buffett is the world's greatest investor. He is the most Intelligent Investor.
