Authored by Simon Black via SovereignMan.com,
Over the weekend on Saturday morning, amid its usual fanfare and attention, Warren Buffett’s company Berkshire Hathaway released its annual report to the public.
This is a pretty big deal each year. Investors and financial reporters typically wait with baited breath to hear what the Oracle himself has to say in his legendary annual letter.
Buffett’s topics in previous letters have covered a lot of ground– the state of the US economy, value investing education, why Wall Street is so deeply flawed, commentary on financial markets, etc.
This year’s letter was, as usual, quite interesting… but primarily because of what Buffett said about his own business.
Berkshire Hathaway is an enormous enterprise; it’s essentially a $500 billion holding company that owns dozens of smaller businesses, all of which collectively generate tens of billions in free cash flow.
Buffett’s primary mission is to acquire more businesses and expand Berkshire’s portfolio… and then ensure that each of those subsidiaries has top quality management to grow the cashflow.
And that’s what was so interesting about this year’s letter: Buffett couldn’t really do his job.
According to Warren Buffett himself:
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In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
That last requirement 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.
Now, consider that Berkshire Hathaway’s cash pile rose to an astonishing $116 billion at the end of 2017.
With that much money on hand, very few companies are out of Buffett’s reach.
Specifically, $116 billion would have been enough money to acquire any one of 465 out of the 500 largest companies in the United States– including Nike, Starbucks, UPS, Netflix, and Ford.
Even more, Buffett had enough cash to collectively acquire a full TWENTY FIVE of the smallest companies in the S&P 500 (including AutoNation, Staples, Bed Bath & Beyond) and still have several billion dollars left over.
But he didn’t.
Even though one of his key roles is to acquire businesses and bring them into the Berkshire Hathaway tent, he didn’t acquire a single one of those companies.
Why? Because they’re ALL overpriced.
Read that quote again: “[P]rices for decent, but far from spectacular, businesses hit an all-time high.”
He went on to write, “Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”
Investors are essentially paying record prices for shares of businesses that aren’t even all that great.
Now, Buffett didn’t specifically advise people to avoid stocks. But actions speak louder than words. And Buffet’s not buying.
Think about that: one of the richest guys in the world– one of the most successful investors in history– thinks assets are too expensive to buy.
People don’t tend to get rich (or stay that way) by buying mediocre assets at all-time highs.
The time to buy is when prices crash… when the highest quality assets can be acquired for peanuts.
And as sure as night follows day, prices will decline. Asset prices always move in boom/bust cycles.
As Buffett himself wrote in the annual report,
In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.
He knows there will always be periods of panic and fear when asset prices crash. But “[w]hen major declines occur, however, they offer extraordinary opportunities. . .”
Taking advantage of these opportunities requires having sufficient ammunition. Namely, cash.
If you want to be able to acquire the highest quality assets when prices crash, you have to be liquid. You can’t have your wealth tied up in illiquid assets whose prices have just crashed.
This is another area where Buffett’s actions speak louder than words.
Over the course of 2017, he increased Berkshire Hathaway’s cash position to $116 billion– a whopping 35% increase over the previous year.
Put these two observations together: Buffett’s NOT buying… and he’s greatly increasing his cash position.
It’s almost as if he’s preparing for a major decline… and getting ready to pounce when assets are cheap.
Actions speak louder than words. And his actions are definitely worth considering.
And to continue learning how to safely grow your wealth, I encourage you to download our free Perfect Plan B Guide.
There is no way this is good for America.
Au contraire. An overpriced market is not good. A major correction will reveal who has been swimming naked. It is not Buffett. I took note of that some time ago.
I was not sufficiently descriptive in giving my opinion. If Buffet has his way, he and a few other .00000001% will own America. This is, in no way, good for America.
I do not for a moment think Buffett wants 0.0001 percent to own everything. He has made millionaires out of countless common men by giving them the chance to buy into his system of investing, holding, re-investing. He is an opportunistic businessman interested in building wealth via smart investing, and then in giving it away. Anyone was able to get on board. Now, shares are so expensive, it is harder.
Bankers, lawyers, corporations and politicians all want to rule/own the world. Buffet has added zero to the world or economy. He siphons wealth/money. He practices centralization.
8 years ago, right before I retired, I saw a mestizo man walking through a run down trailer park dragging a faded ice cream cooler behind him. I realized he was trying to peddle ice cream without even the benefit of a horse or donkey to power his non refrigerated cart. I knew we had reached the saturation point of third world immigration as it would be impossible for him to make even a marginal living using such primitive commerce.
That’s about where we are now in our more sophisticated world. Every trick of financial engineering, Non GAAP earnings trickery and debt leveraging has been used up. Immelt has left the rotting corpse of GE on the Dow Industrials but he redlined the tachometer and this century old icon is an economic zombie and Stumpf has reduced the even more venerable Wells Fargo to the same condition.
Buffett has an insiders view of the rest of corporate America’s balance sheet and if the stench of putrid flesh nauseates him I don’t need to sniff the air to know there’s nothing left to eat.
Meh.
Warren has done very well for himself, but he plays a totally different game than almost anyone.
First of all, he’s using OPM, and not just any OPM but the enormous insurance float of General RE and Geico.
Second, he buys companies that are either monopolies or part of small oligopolies.
That’s what he really does. The monopolies and oligopolies don’t want to sell out now, in no small part because Warren has a lot more competition these days in the form of private equity. His real business model is finding a business owner smart enough or lucky enough to create a monopoly/oligopoly but too stupid to understand what he’s got, or who dies and leaves it to kids who just want to cash out.