Be fearful when others are greedy and greedy when others are fearful
Warren Buffett is sitting on $128 billion in cash and to some he’s seen as a potential savior. To others he’s completely out of touch. A has-been.
California Governor Gavin Newsom is begging Warren Buffett to buy the Pacific Gas & Electric Company, the California utility that went bankrupt in January of 2019 after its equipment sparked deadly wildfires.
PG&E’s stock is down about 75% this year and it is not providing any more 2019 earnings guidance, except for the fact that it expects costs of over $6 billion from the recent California wildfires.
On the other hand, there is David Rolfe, a longtime shareholder of Berkshire Hathaway and the chief investment officer at Wedgewood Partners. Mr. Wolfe told his clients that he sold the firm’s stake in Berkshire after decades of being a shareholder, because of his frustration with Buffet’s huge cash position:
“Warren Buffett’s cash hoard of +$125 billion continues to be a considerable impediment of growth, rather than our previous hard expectation of a valuable call option on opportunity in the hands of one of the most elite capital allocators extant.”
And consider this tidbit: Berkshire’s cash went from about $23 billion in 2009 to $128 billion in 2019. In other words, Warren has increased his cash position by 6-times during the longest bull market on record.
In Warren’s Own Words
Considered one the world’s greatest stock market investors of all time, Buffett has repeatedly said he has one key rule when investing: “Never lose money.”
Has the Oracle of Omaha ever lost money? Yes. But his losses have been small and infrequent compared with his many large, frequent and long-lasting victories – especially when one views his record over the past 55 years.
The value investor in him would rather hoard cash instead of spend money on speculative ideas. And Buffett and his team have just not recently seen many ideas that have met the Berkshire criteria.
In his own words from the most recent annual letter to Berkshire Hathaway shareholders:
“Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.
In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.”
But Just for Fun…
While it won’t happen, consider what Buffett and his $128 billion cash could buy.
Let’s start with the fact that nationally, the average business sells for around 0.6 times its annual revenue. That means Warren could buy a business worth with approximately $213 billion in annual revenues.
And that would include the following:
- Chevron – $166 billion in revenues
- Ford– $160 billion in revenues
- General Motors – $147 billion in revenues
- General Electric – $120 billion in revenues
- Bank of America – $110 billion in revenues
- Microsoft – $110 billion in revenues
- Boeing – $101 billion in revenues
PG&E’s 2018 revenues in 2018 by the way were about $16.7 billion.
Heck, if Warren negotiated well and paid less than 0.6 times revenues, he could afford to buy Microsoft, Boeing and PG&E.
All Investors Should Hold Cash
When markets drop, there is a lot of chatter about how much cash an investor should maintain. The fact is, an allocation to cash is an important part of every investor’s portfolio.
But there are reasons to have cash beyond limiting risk. Cash can allow investors to invest at opportune times.
As the Oracle of Omaha famously said: “Be fearful when others are greedy and greedy when others are fearful.”
When others are fearful (when the markets or a company’s stock price are falling), the time might be a wonderful buying opportunity.
But to act on that opportunity, you need cash.