Warren Buffett is one of the most respected investors of our generation. He primarily invests via his public company, Berkshire Hathaway. The firm reported Q3 results recently, which noted a record high cash pile of $157.2bn. But is Buffett being pessimistic in not wanting to use that cash right now?
Buy on the dips
The $12.77bn net loss for the quarter reflects the unrealised losses from the value of the investment portfolio. It’s true that during Q3, the stock market didn’t perform that well.
However, if I was sitting on that large cash pile, I would have used this dip to step in and buy more of some of the stocks I already own. For example, Buffett holds a large amount of stock in Apple. At the end of Q2 the share price was around $194. During the quarter, it traded down to $170. This drop of over 10% would have been a great time to have stepped in and bought more.
This process is known as pound- or dollar-cost-averaging. It allows an investor to accumulate a larger shareholding at a blended (lower) average purchase price. If someone believes that the fall is just a short-term dip, it can be a smart play. For reference, the Apple share price is now just under $180.
Obviously, it’s easy to make this call with hindsight. Yet even if Apple shares were even lower now, the strategy of buying on dips is one for the long term. I’d be telling Buffett to do the same thing now, as this is in line with his time horizon.
Putting excess cash in dividend ideas
$157.2bn is a lot of cash to be holding, even for Buffett. I know he’s making use of Government bonds in order to generate some kind of return while he waits for attractive stock options. However, I’d be pushing to put some of this in dividend stocks instead.
Selective dividend options can provide a higher yield than short-term bonds, but provide income at the same time. Granted, bond prices are less volatile than share price movements. But my point is that if Buffett wants to make income on the excess cash, dividend shares are a great idea to consider.
Even if I filter for just large-cap firms in the FTSE 100, I can find some attractive ideas right now. Glencore, British American Tobacco and HSBC all have a current yield above 7%.
Perks of cash
Of course, there’s nothing wrong with holding cash. This ease of access is perfect for future opportunities. Even as a retail investor, I don’t want to have no free cash on hand, as it prevents me from taking advantage if something comes up. Further, I need to have cash for personal expenses that I hadn’t planned on having.
Yet if Warren Buffett does give me a call this week (I’m free), I’ll point out my ideas to him.
