Warren Buffett of Berkshire Hathaway released his Annual Letter last weekend. As always there were special insights provided by the most successful investor of all time. This year marks a milestone as it is the 50th anniversary of the founding of the company, one that Buffett and his partner Charlie Munger have owned all that time.
Commentators pour over the letter in an attempt to divine the intentions of the “Oracle of Omaha”, as Buffett is known. But it seems that most analysts missed Buffett’s most important message, even though he’s repeated it often. And that lesson is hiding in plain sight.
Here is a link to the PDF version of his latest letter.
The letter contains 42 pages and much can be learned, even by people with little or no financial background. But I want to highlight just a few things.
On page seven he talks about the insurance business, the core of the Berkshire Hathaway success story and the foundation of Buffett’s immense wealth. The current value of the largest component is $111 billion (all figures US dollars). He goes on to talk about the reinsurance business and GEICO, the company that uses the “gecko” as their advertising icon.
On page 16 he lists the fifteen largest publicly traded ownership positions, with a current value of $117 billion. The big four are:
IBM, Wells Fargo, American Express and Coca Cola. And Wells Fargo is the largest of these, a California-based bank.
Buffett’s largest non-insurance, wholly owned subsidiary is BNSF, a major US railway which is itself the product of the merger of Burlington Northern and Santa Fe. Buffett bought this company in 2009 for about $37 billion. This purchase was a major departure for him since railways require substantial capital investment. Indeed, he mentions that $6 billion of capital upgrades will be made in BNSF in the coming year.
Buffett spends a lot of time talking about his holdings and how they work but there aren’t a lot of highlights of major purchases of companies in the latest year.
Which brings me finally to the mystery that most observers have missed.
Buffett is a serial acquirer of companies, spends most of his day on the telephone talking about investments and yet he’s sitting on a pile of cash of $63 billion! That cash hoard grew by about $15 billion in 2014 and is now the largest ever in 50 years. Why is Buffett not putting that cash to work? After all, Berkshire shares have earned about 19% annually for 50 years, as shown on page 1. Why hold cash, which earns about 0.02% annually in US T-bills?
Buffett has options, even if he didn’t get offered any more BNSF blockbusters. For example, perhaps he could just buy shares of Berkshire Hathaway itself. But he has a rule that he can’t do that if those shares trade at a premium of more than 20% to book value as they do now.
Buffett could just buy more shares of companies that are listed on page 16. Many of those companies earn great returns and could be purchased with the click of a mouse. Because he’s 84 years old maybe he wouldn’t use a mouse, but he could call any number of stockbrokers and you can bet Warren’s calls get answered right away. But he didn’t do that either. So it’s a puzzle.
Often the most obvious explanation is correct, as I believe is true this time. And the most obvious reason is that Buffett thinks that the US market is overvalued. After all he made his last major purchase in 2009 when the market was trading at less than half of today’s prices.
And Buffett is patient.
Buffett states that investors don’t need to swing at every pitch. He used a baseball analogy in his 1998 letter; talking about Ted Williams, a home run hitter, who would wait for a pitch right over the centre of the plate before swinging his bat. Williams was willing to strike out rather than swing at a bad pitch.
So Buffett’s discipline is simple. It’s entirely acceptable to sit on a cash hoard of $63 billion, about 25% of the book value of his company, while he waits for that perfect pitch. Even if that cash is earning a paltry 0.02%.
Individual investors, who universally hate to hold cash that pays nothing, would be well-advised to listen to Buffett’s “hidden” message.
It’s preferable to wait for a really good investment before committing funds. That discipline takes a lot of patience but will be very rewarding.
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