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Discussion in 'Economics' started by Mary Cobb, Aug 9, 2018.

  1. Mary Cobb

    Mary Cobb

    The Warren Buffett Trend That Should Worry Investors
    Berkshire Hathaway's growing cash position may portend trouble.

    original link:
    Sean Williams

    Aug 9, 2018 at 7:36AM

    Chalk up another ridiculously strong quarter for Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) and the Oracle of Omaha, Warren Buffett.

    On Saturday, August 4, Berkshire Hathaway released its second-quarter operating results, and as usual, the conglomerate dazzled. Operating earnings soared by 67% to almost $6.9 billion, while investment income leaped to $4.8 billion from $0.2 billion in the year-ago quarter. As a whole, Berkshire has generated $1.55 billion more in net earnings through the first half of 2018 than it did during the first half of last year.


    But amid all of this good news looms an intriguing data point that I'd classify as somewhat worrisome: the company's cash position.

    Is Berkshire Hathaway's growing cash pile a red flag?

    According to its Securities and Exchange Commission filing, Berkshire Hathaway ended the quarter with $64.56 billion in cash and cash equivalents and $46.54 billion in short-term investment in U.S. Treasury bills. Combined, that's $111.1 billion, or an increase of more than $2 billion from the previous quarter.

    As my colleague Matt Frankel noted earlier this week, the increase in cash value during the second quarter may be entirely attributed to Bayer's acquisition of Monsanto during the quarter. Monsanto was a holding in Berkshire's investment portfolio at the time the deal closed. This would imply that Berkshire Hathaway completely reinvested its operating earnings for the quarter back into stocks; otherwise we'd have seen a larger uptick in its cash position.

    Nevertheless, over the past 20 quarters (that's five years), we've seen substantial growth in Berkshire Hathaway's total cash position. Since partnering with 3G Capital Management to buy Heinz (now part of Kraft Heinz), and announcing a $5.6 billion deal to acquire NV Energy, both in the first half of 2013, Berkshire's cash position has more than tripled.


    This is a far cry from the norm, with Berkshire Hathaway and Warren Buffett consistently holding anywhere from $24.5 billion to $49.1 billion in combined cash and short-term investments between the first quarter of 2006 and the second quarter of 2013.

    Even Buffett sounded off about the company's cash position in an interview with CNBC following the company's first-quarter operating results:

    [Cash is] just about the world's worst investment, except doing something dumb that you're doing for a longer term. I would much rather have that number be $30 billion.

    Here's the big worry

    So why isn't Berkshire Hathaway's cash position smaller? One answer could be that it hasn't found the right needle-moving transaction yet. Buffett hasn't been shy about his belief that any acquisition his company undertakes will have to be substantial to move its top and bottom line. These so-called needle-mover transactions aren't cheap, which may have persuaded Berkshire's board to build up an adequate cash position.

    It could also be suggested that as Berkshire Hathaway has grown, its need to maintain adequate capital on hand has as well. Remember, this is a company with major financial roots, and is thus required to be adequately capitalized.

    But the big worry, and the reason investors should be paying close attention to Buffett's actions and commentary, is that the Oracle of Omaha may not see anything of value to buy.


    To be clear, even though Buffett has preached the value of long-term investing, he, like the rest of us, still wants to get a good deal when investing in a company. After all, there's a big difference between taking a minority stake in a multibillion-dollar business and shelling out $40 billion, or even $100 billion, to acquire an entire company.

    With the exception of taking a 38.6% stake (worth nearly $2.8 billion) in Pilot Travel Centers, the owner of the Pilot Flying J truck stop, in 2017, it's been three years since Buffett acquired a 100% stake in any company. The last time Berkshire Hathaway went three years without an encompassing acquisition was between 1992 and 1995. The fact that Buffett and his team haven't pulled the trigger after three years may suggest their leeriness toward current stock valuations.

    As evidence, I turn to the Shiller price-to-earnings ratio of the S&P 500. This particular P/E ratio is based on the average inflation-adjusted earnings from the previous 10 years. Its current reading of 33.1 is higher than on Black Tuesday during the Great Depression, and only topped by the dot-com bubble at the beginning of the century. By all estimates, the stock market looks to be frothily priced, and that might be persuading Buffett and his team to holster their cash.

    The question we have to ask as investors is this: Does Buffett's willingness to invest a few billion in a handful of stocks here and there outweigh the company's unwillingness to make acquisitions? If it doesn't, it could be a warning that rougher times lie ahead for the stock market.
  2. JSOP


    Well there is only so many companies that Buffett can buy. What, you want him to buy like 10,000 companies a day? To me, Buffett is being prudent. He only wants to invest in the best of the best of the best, or at least ones that will generate positive returns in real value for its shareholders and for himself. You are NOT supposed to be 100% fully invested anyway despite what they say. You are supposed to keep some cash in a portfolio as long as it's not too big of a portion. Berkshire Hathway's total assets is US$702.09 billion by the end of 2017, even if the total cash position is 111.1 billion, that's only (111.1 / 702.09) = 15% of the total portfolio and mind you we are only using the total assets number as of 2017. With the 2018 total assets number, the % would be even lower. So translated to us laymen's equivalent, let's say your total investment portfolio is $50,000, only $7912 would be in cash. And you don't think that' prudent to keep that small amount of money in cash? Berkshire's number just looks big because it's Bershire.

    And furthermore, even with the "growing" trend in the cash position which this author claims has climbed $2 billion from the previous quarter, he's neglecting the fact that its investment income has also climbed 23% and if you compare apple with apple, and compare that with the growth in cash position, in Q2 of 2017, the cash position was $99.75 billion and in Q2 of 2018 the cash position is 111.10 billion, only a growth of (111.10 - 99.75) / 99.75 = 11%, less than half of the growth in investment income, so it means Buffett is investing more than half of what he earned in investment income and put it in cash meanwhile keeping the cash position still at 15% calculated off the 2017 total assets number. And it's still alarming or "worrisome"?? Much ado about nothing.
    Last edited: Aug 9, 2018
    DanHafidan likes this.
  3. Why Facebook, Inc. Stock Dropped 11.2% in July
    That's not to say Facebook's results looked bad at first glance. Revenue climbed 42% year over year to $13.2 billion, while earnings per share grew 32% to $1.74. Facebook's daily and monthly active users also each grew 11% year over year to 1.47 billion and 2.23 billion, respectively.

    By contrast, however, most analysts were anticipating higher revenue of $13.4 billion, albeit with slightly lower earnings.
  4. JSOP


    Bottom Line: People need to analyze the news critically, with different angles, not just from the author's hocus-pocus numbers.
  5. dozu888


    too much cash... this is a problem a lot of people have right now.