Warren Buffett has made a couple of interesting decisions of late with the Berkshire Hathaway portfolio. As arguably the world’s greatest investor with an impressive track record, these choices have generated banner headlines and retail investors like myself have lapped them up.
What’s going on with the Oracle of Omaha? Should I be making a reshuffle like he has with my own portfolio?
Money, money, money
The big news is that Buffett has been stockpiling cash and lots of it. Recent sales have pushed Berkshire’s “cash and cash equivalents” to $277bn.
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This massive sum is about a third of the company’s total market cap, a large amount indeed to be kept on the sidelines, especially for a man who has become one of the world’s wealthiest people through deploying his cash rather than keeping it in reserve.
It’s true that higher interest rates mean a lower opportunity cost here. That cash can spit back an easy and safe 5%. That’s above current levels of inflation too. And it’ll look like a superb place to park money in the event of a crash or correction, which does make me wonder whether Buffett is expecting one.
High US valuations
Another piece of evidence for Buffett’s bearishness is just how much he makes his money work for him. US stocks on the S&P 500 have an annualised 10% return rate going back decades.
That’s pretty good already. But Berkshire Hathaway has posted an annualised 19% or so. Buffett is in a very different position to the average retail investor and is clearly not seeing good options to invest his billions in right now. He confirmed as such back in May when saying: “Things aren’t attractive.”
One concern of his is likely the high valuations across the pond. The average S&P 500 price-to-earnings ratio has risen to 27, implying a position needs 27 years of profit to make back the stake.
Compare that to the FTSE 100 ratio of 14, which seems like much fairer value. There are stark differences between the make-up of each index but still, on P/E ratio alone, the US stocks cost double UK ones.
Sticky products
One of the reasons he has so much cash is he sold a large portion of his huge position in Apple (NASDAQ: AAPL). The US tech giant has been a big winner for decades past, and recently too. The shares are up 37% since April. But Buffett has decided he was too invested and halved his stake.
I hold Apple shares myself, appreciating the ecosystem as a consumer and seeing first-hand the stickiness of its products. The price does seem on the high side to me with a forward P/E ratio of 33.4, even higher than other US stocks.
But the tech giant has looked expensive for decades and that hasn’t hurt its prospects at all. I don’t plan to sell. Let your winners run, as they say.
