Berkshire Hathaway has been holding roughly $140 billion during a period of raging inflation (source):
This is about 20 percent of the company’s market cap (about $700 billion). The standard explanation for this is that it gives Berkshire Hathaway the ability to pounce on great deals, but Elon Musk is managing to buy Twitter without having had to let inflation erode a substantial percentage of his portfolio for 2+ years. The company’s annualized operating earnings right now are about $22 billion (CNBC). Inflation has been 8.5 percent. So the company is losing $12 billion to inflation annually, more than half as much as its headline “earnings”.
Admittedly the S&P 500 is flat compared to a year ago as well, so if Warren Buffett had done the obvious thing of parking money in the S&P it wouldn’t have done significantly better. Gold didn’t rise smoothly as the dollar fell in purchasing power. Bitcoin is about 32 percent lower today in nominal dollars than it was a year ago. But isn’t there something better to do with all $140 billion rather than leave it for exposed to the depredations of the government’s money-printing operation?
I’m thinking Berkshire’s various insurance businesses and the natural uncertainty around those drive the holding company’s liquidity choices.
He was buying stonks when everyone else was dumping stonks & getting into cash, 15 years ago. When everyone else was dumping cash & getting into stonks last year, he was getting into cash. It should be illegal to go against the herd.
This year, he has been the primary buyer during the dip buying sprees.
Cash is at the shortest end of the yield curve. Why is anybody holding 20 year treasuries? That’s where the damage is being done. The dollar itself is okay, as long as you compare it with something more credible than the price of Wheaties.
If something like real hyperinflation looms, then literally anything is better than cash or bonds, but that’s not what’s happening. The Fed is raising rates to combat inflation that is caused by many different things (fiscal policy, foreign wars, Covid shutdowns and giveaways, an aging population, as well as its own monetary looseness.) They can fix the latter, but nothing else, and so they are almost bound to overshoot.
Buffett and Munger don’t buy crap at high valuations, and all they see is a sea of overvalued crap.
This last couple of months seems to have been a good time to be in cash.
SuperMike: That’s for sure! But Berkshire Hathaway has had a similar amount of “cash” (as John notes below, “cash” might not be “cash”) for years! The stock market is up quite a bit in nominal dollars over the period covered by the chart in the original post (July 2019 to today). From about 3,000 to about 4,000. Nowhere near keeping pace with house price inflation, but Warren Buffet would have had to buy a lot of houses to consume $120+ billion, even at Miami Beach prices.
“But isn’t there something better to do with all $140 billion”
Do what I did today – bought a 3-year CD paying 3.1%.
Inflation is 9% probably more…
“Cash” on a balance sheet doesn’t literally mean cash, it means “Cash and cash equivalents” which includes anything liquid marked at a known price with insignificant risk. Can even include short-maturity preferred shares.
They are likely earning 4-5% on the balance at the moment. Lower than inflation, but the cost of doing business while waiting to deploy capital.
Elon Musk’s trading strategy is not one that any normal human being should follow. He’s been heavily levered for decades by borrowing against his shares, which only works when they keep going up. Most people who do this are bankrupt and forgotten within a few years.
The fact that he is selling shares outright, for the first time in decades, is an interesting signal that would normally indicate he believes it is time to diversify. Perhaps because the market currently believes his auto company is worth more than the other 10 largest auto makers combined.
Of course, given what he’s now doing with that liquid cash, it seems more likely he is simply bored and not attempting to maximize total returns.
Was I smart to sell my share of brk.a when I did and buy VTSAX?
TS: When was the trade?
Maybe he could buy $140 billion in forever stamps
“But isn’t there something better to do with all $140 billion” – its quite possible there isn’t, finding something that’s priced adequately even after correction and would be big enough to be bought without liquidity losses much bigger than inflation.
Musk who had to offer 44bn for Twitter that had 26bn market cap. That’s a loss equivalent to 4 years of 15% inflation.
“Parking money in S&P” is far from an obvious choice, both from what’s going on with the economy (which they were expecting, there was a great interview by Buffer, Munger and Gates on CNBC ~3yrs ago) and liquidity as well as it’d mean buying 0.35% of it presumably in a short period of time.
This graph from the FED (monetary base, total) is quite illuminating. The gambling started in 2008, and the money supply is now nearly seven times higher than in 2008. During the Trump administration the money supply was reduced!
https://fred.stlouisfed.org/series/BOGMBASE