Legendary investor Warren Buffett has built up the biggest cash pile ever seen at the Berkshire Hathaway investment group he’s run for more than five decades. He recently reported that at 30 June, cash within the group stood at a whopping $99.7bn (£77bn). Heck, he could buy Lloyds outright at its current price and have enough left over to add Rolls-Royce and Tesco too.
If the world’s most famous investor is hoarding cash on a grand scale, should we follow suit? Could he be telling us a market crash is coming? Should we perhaps even consider selling our shares?
Valuations
Buffett has stated flatly: “I hate cash”. And three years ago — when Berkshire’s hoard was already up to $50bn — he told shareholders: “We shouldn’t use your money that way for long periods.”
The reason the cash pile has grown is that he simply hasn’t found enough attractive businesses at sufficiently attractive prices to deploy it. Put another way, he sees too many of the companies he might want to invest in as overvalued.
Lord Rothschild, another shrewd octogenarian with a tremendous long-term investing record, is similarly concerned about current equity valuations. He wrote earlier this week: “Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured. The S&P is selling at 25 times trailing 12 months’ earnings, compared to a long-term average of 15, while the adjusted Shiller price earnings ratio, which averages profits over 10 years, is approximately 30 times.”
Disciplined investing
Buffett and Lord Rothschild aren’t saying: “Markets are going to crash — get out quick!” However, a happy corollary of focusing on company fundamentals and refusing to buy at inflated valuations — which is what they’re doing — is that they’ll tend to have more cash to deploy when markets do undergo a correction or crash.
Successful investors maintain their discipline on valuation. Less successful investors get caught up in the euphoria of bull markets. For example, you may find yourself tempted to pay 20 times earnings for a company you’d previously valued as worth no more than 15 times earnings. Or you may be tempted to buy into a company you’d previously ruled out on account of its high level of debt.
At times like these, it’s worth remembering Buffett’s famous baseball analogy: “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.”
The message remains the same
Even when equity markets are trading at an overall high valuation, investors like Buffett and Lord Rothschild still find pitches to swing at.
For example, Berkshire group has more than doubled its stake in Apple this year and is currently trying to conclude a $9bn takeover of Texas utility giant Oncor. Select financials — including a new position in US private-label credit card firm Synchrony Financial — have also been on the shopping list.
So, despite the record cash pile, the message remains as it ever is: don’t pay silly prices but continue to buy shares in good companies when they can be purchased at reasonable valuations.
