Figure 1: Berkshire Hathaway cash and equivalents
‘Our Not-So-Secret Weapon’
The Berkshire Hathaway 2023 annual report’s chairman’s letter by Warren Buffett included a page with the above heading. The ensuing five paragraphs are excerpted from that letter.
Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. Indeed, markets can—and will—unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001. If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often—but they will happen.
Berkshire’s ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity. Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.
One fact of financial life should never be forgotten. Wall Street—to use the term in its figurative sense—would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed—not by everyone but always by someone.
Occasionally, the scene turns ugly. The politicians then become enraged; the most flagrant perpetrators of misdeeds slip away, rich and unpunished; and your friend next door becomes bewildered, poorer and sometimes vengeful. Money, he learns, has trumped morality.[1]
One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been—and will be—rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.
Figure 2: Apple price and volume chart
Since year-end 2023, the last two bars were added to the chart above. Cash and equivalents at Berkshire rose from $175 billion to $325 billion, a good portion of which was generated by selling shares of Apple. Five years ago, Apple traded around $40 a share; it spent much of 2024 trading above $200 a share.
According to the company’s November 2 earnings release, Berkshire sold about 100 million, or 25%, of its Apple shares over the summer, ending with approximately 300 million. Berkshire has now sold more than 600 million of the iPhone maker’s shares in 2024, though Apple remains its largest stock holding at $69.9 billion.
That made the quarter the eighth straight where Berkshire was a net seller of stocks. Not mentioned is that the $325 billion in cash and equivalent reserves compares to its $354 billion marketable securities portfolio as of year-end 2023, a cash-to-marketable-security-portfolio-assets ratio of roughly 50%.
The Omaha, Nebraska-based conglomerate also conducted no stock buybacks for the first time since the second quarter of 2018. Berkshire’s cash stake is more than 10 times the $30 billion cushion that Buffett has pledged to maintain. Additionally, he has made no major acquisitions of whole companies for his $975 billion company since 2016.
Buffett’s “not-so-secret weapon,” as noted in the 2023 annual letter excerpt above, is to sell on good news so you have cash to buy on bad news. Only a tiny fraction of investors have the willpower to walk away from the table when they have a hot hand. The wealthiest diversified investor in the world advises: You can enjoy great investment success “if you make a couple of good decisions during a lifetime and avoid serious mistakes.”
Flashback to 2007
As a financial-markets observer for decades and author of Speculative Contagion (2006) and A Decade of Delusions (2011), I have closely observed Warren Buffett and his longtime sidekick Charlie Munger. I was among the 25,000 faithful who attended the May 2007 Berkshire Hathaway annual meeting in Omaha. For several years I had weaved my way through the queue to put a question to Warren or Charlie. For example:
Warren, having read and reread your [2006] chairman’s letter, I was particularly struck by your “help wanted” ad for an eventual successor to you and Lou Simpson to oversee Berkshire’s investments in marketable securities. Instead of advertising for a Ted Williams, the Hall of Famer to whom you often refer because of his rational approach to becoming a hitting legend, you propose to recruit the consummate defensive player. Here are your words, and I quote: “We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of models commonly employed today by financial institutions.” In a world where everyone’s talking about return, you talk about risk.
What I inferred from this job description, your warnings on derivatives, the dollar, executive compensation, the Gotrocks family and its “handlers,” your preference for private deals over publicly traded stocks, among others, is that in general since 1999 your assessment of the investment environment in marketable securities does not appear to be radically different than how you felt when you more or less took a multi-year hiatus from marketable securities because you simply didn’t like the odds.
Buffett’s prescience revealed his genius. He saw trouble long before it was apparent and well before the popular averages headed south with abandon. It should be noted, however, that the rout was so pervasive and sellers in such a panic that it was difficult for Buffett to seize the moment. I had long followed a company he and I both admired. I wrote him in March 2009, advising that he should be able to acquire roughly 80% of the company in a tender offer that management would support. Things were so hectic that Warren concluded that anything short of acquiring the entire company would be too time-consuming.
Trashed Cash Will Become King Again
As bitcoin skyrockets upward, the very cryptocurrency that Buffett has deemed to have no intrinsic worth, and as the Shiller CAPE (cyclically adjusted price-earnings ratio) has levitated to the ozone level of 38, a valuation so rich that 10-year future compounded returns are almost certain to be subzero, Buffett is holding record amounts of cash. In the inimitable words of Buffett’s late partner, Charlie Munger, who died in November 2023 (a month shy of his 100th birthday), “The key to long-term investment success is to avoid wealth-destroying catastrophes.”
Buffett, 94, doesn’t know what opportunities will present themselves but “Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced.” And then, when least expected by today’s speculators large and small, cash will be king.
[1] A social-commentary double entendre?