The Daily Telegraph - Saturday - Money
Buffett has a huge cash pile. Should you, too?
The cash pile at Berkshire Hathaway, Warren Buffett’s investment company, has grown to $130bn (£100bn). The master investor has said he is struggling to find quality companies at “sensible” prices. Should small investors be following his lead?
Berkshire has around $200bn invested in a variety of companies. Its top holdings include bank Wells Fargo and soft drinks giant Coca- Cola. It has been investing this year, pumping billions more into its Apple holding, but has not undertaken any major new deals. Berkshire is sitting on cash at a time when there is feverish activity in the market, with company acquisitions reaching near-record values.
Russ Mould, of investment shop AJ Bell, explained that acquisitions rise “when company executives feel their own shares are expensive enough”, so are not indicative of reasonable prices.
In his annual letter to shareholders in February, Mr Buffett said: “That requirement [a sensible purchase price] proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high.”
Mr Buffett’s tactic is to be patient, and wait for the high-quality firms he invests in to be available at the right price. He built up significant cash piles in the run-up to the bursting of the tech bubble and in the years preceding the global financial crisis.
“Investors may like to take note that the ultimate contrarian is once again sitting on the sidelines while stock markets rise,” said Mr Mould.
Marcus Brookes, manager of Schroders’ Diversity funds, holds a significant amount of cash – more than 20pc – in a number of funds.
He said: “We share Mr Buffett’s view with respect to the valuation of American stock markets. There are better opportunities elsewhere, such as Japan, Europe and emerging markets, but relative to history none of them look particularly cheap.
“When everything looks expensive, cash may be a more appropriate holding, while you wait either for company earnings to justify share prices, or for share prices to fall. You can buy very good companies and lose money if you pay the wrong price.”
Helen Xiong, manager of the £1.8bn Baillie Gifford American fund, explained that individual investors are in a different position to Mr Buffett: “Berkshire is a large conglomerate with $200bn invested. When you have that much capital, you face a diminishing trickle of investable ideas. We [and smaller investors] are coming from a very different perspective.”
She added that the standard metrics used for valuing companies, such as earnings multiples, may not be the best way to assess the future potential of a business, either.
“First, all that data is based on past earnings, and all the value is in the future,” she said. “Second, none of the rate of innovation, quality of management or company culture can be found in the financial statements.”