Guest Post by Simon Black
Buffett’s holding company, Berkshire Hathaway, just announced a blockbuster quarter, earning nearly $7 billion.
And Buffett’s still sitting on over $100 billion of cash. That means he’s got enough money to buy almost any company he wants, anywhere in the world.
But the only move Buffett made in the last quarter was buying $928 million of Berkshire Hathaway stock.
Some people might say this is a sign that Buffett thinks Berkshire’s stock is incredibly undervalued.
To be fair, nobody knows Berkshire better than Buffett. And shares may present a good value at this level – an all-time high price.
But it’s clear to me that Buffett simply can’t find anything else worth buying.
Remember, Buffett’s got over $100 billion in cash (and he could use debt to fund an even larger acquisition).
So he could buy stock in any publicly traded company. Or he could buy most any private company (the last time he did this was Precision Castparts in 2016 for $32 billion).
He’s got so much cash he could even buy any one of the 451 out of 500 largest companies in the US – Nike, Starbucks, Goldman Sachs, etc.
But, nope… He just bought back some Berkshire stock.
In addition, he’s selling longtime holdings like drywall maker USG and IBM (for a $1 billion loss).
I wrote about Buffett and his giant cash pile in February, just after Berkshire released its annual report.
Back then, Buffett had a whopping $116 billion. But still couldn’t find anything to buy. As he said:
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.
As we wrote back then, it seems people are still willing to pay far too high a price for not that great of businesses.
Buffett is famous for saying “be fearful when others are greedy and greedy when others are fearful.” And he’s sticking by that mantra today.
Like Buffett, I’ve also been raising cash. In fact, I’m sitting on more cash today than at any other time in my life.
And, like Buffett, I’m mostly holding that cash in 28-day T-bills.
However, unlike Buffett, I don’t have $100 billion to spend.
If I make a 20-50% return on a $5 million investment, that’s meaningful to me. But that’s peanuts to a guy like Buffett.
He’s got to put billions of dollars to work to generate enough cash to make a difference. And that severely limits the areas he can hunt for value.
But I’m able to look at all kinds of opportunities – like loans backed by fine wine, loans backed by bullion or European real estate and various, small-cap stocks around the world.
Despite most markets trading at or near all-time highs, there’s still a ton of value if you’re willing to do some extra work and look outside the US.
In The 4th Pillar, Tim Staermose just identified a consumer products company in South Korea trading for a 12% discount to its net cash backing.
He’s also recommended a security that holds portfolio of blue-chip stocks (including companies like Starbucks) trading for over a 20% discount to their market value.
And those are just two of the many opportunities you can take advantage of today in his 4th Pillar portfolio.
Value investing has been left for dead as the dumb money has chased up the value of companies like Uber and Tesla.
But when you can buy a profitable company for less than the amount of cash it has in the bank, it’s pretty hard to go wrong.
I’ll bet Buffett would make those investments if he could.
And to continue learning how to safely grow your wealth, I encourage you to download our free Perfect Plan B Guide.
I have commented on BRK here previously. When it was around $200 (BRK-B) I said it was 40% undervalued and gave it a target price of $250 plus. Today it is $220~ and has been given a new price target of $265. It will get there quickly IMO. For a stock like this to be trading at a PE of 12 is a gift.
BRK does not purchase shares unless the book value is 20%+ higher than the stock is trading. When Buffet began buying it was 40% less than book. Less sophisticated analysts will also likely be ignoring the idea that Berkshire is a huge insurance company and it is a fine idea to have a mountain of cash in case of disasters. That also supports the value of the stock by relieving any pressure to sell stocks or businesses to pay for a CAT 5 striking a major city.
Buffet is the smartest guy in the room for real, whether you like him or not. He will make a lot of money for you.
Munger and Buffett cannot live forever. Then Berkshire may become just another example of a company going down the drain, AKA GE, IBM, etc.
Dunno about GE, but IBM is definitely going down the drain. Their death will be not be quick or merciful. Their death will be drawn out like that of Sears. Periods of slow decline, interrupted with short spurts upward that give false hope to the deluded. Sears management made some bad mistakes 10, 20, 30 years ago that could have been reversed, if management had been willing to humble themselves and admit mistakes, get some good consultants, survey their customers to learn how to regain their market, but they wouldn’t do it.
When a company grows beyond a critical size, management becomes so rigid that innovation is suffocated, kinda like how Antonin Scalia was suffocated with a pillow. Middle and upper managers are always busy building empires and jockeying for position. Nothing happens without several people getting their piece of the credit. I saw that inside a big company. When a company cannot give birth to new technology, or doesn’t have the vision to develop the new technology and sells it like IBM for a few pennies to a competitor who makes billions from it, they are headed down the drain.
Thomas Jefferson is reputed to have said that countries need to have a new revolution every 20 years or so to shake things up a bit. That also applies to companies.
IBM has fallen victim to the twin demons of Political Correctness and virtue signalling. They are really proud that they have a female CEO, but they just spent 34 Billion Dollars for a company possessing capabilities that IBM should have developed internally. The company they bought does not even possess unique capabilities, and that companies competitors may actually be better at what they all do. Did the old management at IBM execute properly their most important task, developing successors that were as capable or better than the former management team?
It is not redundant to say again that the most important task of management is identify, groom, and train their replacements, and insure that their replacements are better than them. It should be a point of pride to develop a replacement who can step in, run the organization well, and guarantee the longtime legacy of the original manager. Often people who were hailed as geniuses and visionary leaders cannot leave when their time is up. Have Warren and Charlie trained successors that will keep Bershire rolling on successfully?
The second most important task of a manager or leader is to design the company structure so that it does not become overly rigid, resistant to change, and caught up in the past. I recently read (on Miles Mathis’ site, about the last place I would expect to find business wisdom) about a company that had perfected the art of building horse drawn wagons in the late 1800’s. About 1905 or 1910, someone there realized the future was building trailers for trucks, and convinced the company to move into the future.
There are some guys in the Midwest who build really fine horse drawn carriages and wagons. Their only market is the Amish. I realize that the Amish will never change, and they do reproduce like rabbits, but somehow building carriages for the Amish seems limited. The Amish are really fine people though.
“kinda like how Antonin Scalia was suffocated with a pillow.”
NBQ – Sneaking in lines like this has you moving up my list of must read posters.
GE is in shit city, much like IBM. Jack Welch was a savant, but has been followed by idiots. Immelt was a disaster. I was just reading where many analysts are forecasting them to go bankrupt sooner or later. The list of companies that failed to innivate when they were all powerful is quite large, including IBM, GE, Kodak (sheesh how they did not see the end of standard photography, etc., and get into digital in a big way is astonishing), Sears, etc.
On the contrary, Buffett has oft stated his intention to run BRK for several years after his death.
McCain sure wanted to run for another term in the senate, despite being room temperature.
The guy who has made the most money of any of the stock buyers and analysts at BRK is on the board and eligible to become chairman. He’s only mid 60’s.
I’m not a Buffet fan but I do credit him with one of the greatest quotes I ever heard:
“If you’re in a poker game, and after 20 minutes you haven’t figured out who the chump is, then you’re the chump”.
I have a business for sale. A one person Chiropractor business but…
Everybody I know fitting that description made out like a bandit.
Add Xerox to the list of company s saying hey, what’s that goat doing up here in the clouds?
Didn’t they invent the PC but not know what they had? Like Magnavox with what became the Nintendo game system? People invent stuff for one thing and never imagine doing anything else with it. Funny.
Fuck that geriatric insider-trading gasbag.
He could corner the silver market without taking on debt and hence no margin calls and forced selling unlike the Hunt Bros.