Wow, Warren Buffett’s (Berkshire Hathaway) Cash Position Rockets by an Astounding 34%! Bullish in Words, Bearish in Action

Wow, Warren Buffett’s (Berkshire Hathaway) Cash Position Rockets by an Astounding 34%! Bullish in Words, Bearish in Action

The world’s most successful and revered stock market investor Warren Buffett has been an inveterate bull. In his 2015 letter to his flagship’s Berkshire Hathaway, Mr. Buffett asserted betting against America would be a losing proposition, “For 240 years it's been a terrible mistake to bet against America, and now is no time to start.”

In September of 2017, he made a bold and controversial claim that the Dow Jones Industrials, which was then at 22,400, would hit 1,000,000 in 100 years. However, even the mainstream media smelled the dissimulation from the Sage of Omaha’s prediction. The CAGR for the 100 year period would tally to only 3.87% compared to the CAGR of 10.7% since 2008! Mr. Buffett essentially framed the public to believe in his optimism while concealing his dampened expectations on returns!

Yet, because of his popularity, a countless number of followers has turned every Berkshire Hathaway’s shareholders meeting into the “Woodstock for capitalists”.

Mentored by the great value investing guru Benjamin Graham, the folksy Mr. Buffett has been renowned for his value investing approach

However, Mr. Buffet’s investing approach has long evolved. It has metastasized from value investing towards taking advantage of the political environment, through insider privilege and as a “champion of bailouts”, the establishment “investment moats” from politically bestowed monopolies and from the Federal Reserve’s insidious transfer policies to generate outsized profits. These practice defined in two words, political entrepreneurship.

And cronyism has reverberated on Mr. Buffett’s brand of politics. Mr. Buffet has repeatedly called on fellow billionaires to pay higher taxes. Paradoxically, Mr. Buffett’s companies have not only squared off with the IRS, they have used loopholes and accounting tricks to skirt tax payments.

Now to the heart of the story.

Striking self-contradicting insights seem to encompass Mr. Buffett’s latest bonfire for investors.

As Mr. Buffett has harped on higher taxes for the rich, he attributed the significant jump in the company’s book-value growth to Mr. Trump’s tax reform, “The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code” Berkshire Hathaway 2017 Annual Report p.7 

And instead of putting his words into action, Berkshire Hathaway amassed the biggest cash and cash equivalent position ever! (bold mine)

Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers – or even that of friends who may be facing liquidity problems of their own. During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that protected us from having to rely on funding sources such as bank lines or commercial paper. We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures. (P.7)

Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we will need to make one or more huge acquisitions. We certainly have the resources to do so. At yearend Berkshire held $116.0 billion in cash and U.S. Treasury Bills (whose average maturity was 88 days), up from $86.4 billion at yearend 2016. This extraordinary liquidity earns only a pittance and is far beyond the level Charlie and I wish Berkshire to have. Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets (p.9)

Wow, that’s a whopping 34% surge in liquidity that “earns only a pittance”!!!

Why? Because “economic discontinuities” may be an obstacle to Dow Jones 1 Million????

For every USD invested in stocks, Berkshire has .68 cents in cash. Or, the ratio of stocks-cash is 60-40. Total equity position as of 2017 was USD 170 billion. That’s hardly a staunchly bullish position!

And if you should notice, this hasn’t been an anomaly. Berkshire’s cash hoard has vaulted in the past 3 years, growing by 20.4% and 13.4% in 2016 and 2015, respectively.

Note from the above data, I tabulated only the cash and cash equivalent segment of the insurance business sans the rail and financials.

Given the way the market has behaved, lack of opportunities can hardly explain Berkshire’s swelling cash pile.

Shouldn’t this hoarding of cash, coming at the expense of stocks, be discerned as “betting against America”?

Or has the lessons of the Great Recession sank into Mr. Buffett? Berkshire has had little elbow room to use during the ensuing fire sale triggered by the Lehman collapse. (see above)

And interestingly, while Mr. Buffett told the public that the Dow would hit 1M, he was silently amassing cash!

Warren Buffett’s saying one thing and doing another serves as a noteworthy example of DEMONSTRATED PREFERENCE.