🤔 Why is Buffett Sitting on $149 Bn Cash?
In the age of cryptos, startups and SPACs, has the charm of Warren Buffett and Berkshire Hathaway waned?
Warren Buffett: the ultimate stock market guru seems to be channeling Geet from 'Jab We Met' right now. Umm, what?
Yeah, Buffett's own company Berkshire Hathaway is his favourite stock pick right now! The company bought back its own shares, worth $7.6 billion in the third quarter of 2021 and $20.2 billion in the entire year!
But why would a company buy back its own stocks?Â
The practice of buying back stocks is pretty common. And believe it or not, it can benefit shareholders like us. How so?
When a company buys back shares from shareholders, it absorbs them, removing them from circulation. This move can mean different things to different people.Â
Some see the return of cash to shareholders as a sign that the company does not know where to invest and grow its business.Â
And then there are a few who see this move as a sign of the company's confidence in its business. It’s a signal that the shares are undervalued. So the company thinks it is profitable to buy back at a lower valuation.Â
As shares are bought back by the company, there are fewer shares left in circulation and shareholders who choose not to sell end up holding a higher proportion of the company’s shares.
And this move is kinda fair: those who want to exit the company can sell their shares back to the company (usually at a higher than market rate), and those who want to stay invested in the company’s future, hold on.Â
In a period when stock markets the world over have gone absolutely crazy, the greatest investor of all time is having a hard time finding a good bargain. And so, it’s buying the stock it knows best: its own.Â
And behold: Berkshire Hathaway stocks have given investors a total return of 39.1%, outperforming the S&P 500's 33.8% returns! Â
Sounds awesome, right?Â
But why is Berkshire Hathaway not reinvesting its cash?
Lack of good investment opportunities.Â
But how is that even possible? Especially with the ongoing IPO boom, startup craze, crypto mania and the stock market frenzy? When the whole world is going gaga about investments, Berkshire Hathaway is not capable of finding a good investment opportunity?
Well, the rose-tinted glasses that the rest of the world is wearing, Buffett does not have them on. Here’s what he said in Berkshire’s Annual Meeting of 2021:
There were at least 2,000 companies that entered the auto business because it clearly had this incredible future. And of course, you remember that in 2009, there were three left, two of which went bankrupt. So there was a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.
Sure there are many opportunities. Sure there is a race to invest more and jump in on the next ‘billion-dollar idea’. But are they really worth the price? Buffett doesn’t think so. And this lack of investment opportunities has pushed the company's pile of cash to a record $149.2 billion! That is more than the current GDP of Kuwait.
Meanwhile, Berkshire Hathaway's current investments are also going through a rough patch. Its railroad and housing businesses have been impacted by the global supply chain crisis. This has caused Berkshire Hathaway's Q3 2021 net earnings to fall by 66% year-over-year. The legend says that it means nothing. It’s just ‘accounting’.
While Berkshire Hathaway is taking extreme caution in putting its money, many can’t help but think that the company is now losing its charm.
Who do you think will have the final laugh? Who will the markets favour in the long run? The compulsive investors or the slow movers?
Only time will tell…
Until then, ReadOn!
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