Hoarding US $137 Billion in Cash

May 12, 2020

For the past two years I have attended the Berkshire Hathaway Annual Meeting held in Omaha, Nebraska to listen to the sage wisdom of Warren Buffett and Charlie Munger. Due to COVID19 instead of attending the CHI Health Center with 18,000 other shareholders I joined 613,000 others watching it for 5 hours on Yahoo Finance. Why am I interested in Buffett & Munger? The answer lies in learning about investing from the masters. I enjoy hearing about their values, particularly from the board and executive team and the responsibility they feel towards their shareholders. I have always admired leaders who are unafraid to bring their mistakes to the fore, explain what went wrong, genuinely apologise, talk about their learnings and then focus on the path ahead. It’s refreshingly authentic and why so many shareholders have remained so faithful for so long. This is why investing in a business is linked to the confidence you have in the board and the management team and it summarises these two people’s belief in owning good businesses.

Buffett has 99% of his personal wealth in Berkshire Hathaway and he is considered the wealthiest investor in the world. It’s therefore easy for him to say to any disgruntled shareholder “whatever you lost, I lost more”. Buffett is 89 and Charlie Munger 96 and their interest and mental agility enable them to spend seven hours in front of shareholders answering questions. Buffett spoke during the Yahoo Finance televised AM for four and a half hours either as a monologue or answering questions asked by Becky Quick of CNBC. Many of the assigned financial analysts and journalists were impressed by his knowledge of the businesses owned by Berkshire. Frankly, it’s incredible that two people of these late ages are even interested in managing such a massive conglomerate.  

Berkshire Hathaway owns 97 businesses and investments. It’s largest holdings in order of size are Apple, Bank of America, other businesses, Coca Cola, American Express, Wells Fargo, JP Morgan Chase, US Bancorp, Moody’s, Bank of New York Mellon etc. Despite the size of the holdings and the household brand names the two companies which always get a great shout out are See’s Candy’s and Geico. See’s is wholly owned and both men love eating sweets so like Coke it sits centre stage in the form of peanut brittle. I’ve tried to match eating as much peanut brittle as Charlie Munger does and the only way I could succeed was sharing it to my five shareholder mates in row 6.

Geico is the second largest auto insurer in the US and Buffett insists that its premiums for cover can’t be beaten. He challenges everyone to get a quote. This is one of his greatest strengths, selling. He says that Berkshire Hathaway Insurance, of which Geico is part is set up to handle three catastrophes in a row. His claim is that the business is more than adequately capitalized to manage the insurable risks. His view is that most insurers would be in trouble after one catastrophe. So the point I’d like to make is that Buffett and Munger are well placed to evaluate risk and even in dire circumstances well positioned to take market share away as competitors collapse. This strategy Buffett calls building a “moat”. This is a form of protection around an asset/business more often found in a government agency, monopoly or duopoly scenario.

The elephant in the room for Berkshire, an investment business with a book value of $370 billion is why is $137 billion tied up in cash? The cash has grown since I started attending the meetings. It was $112 billion in 2018 & $124 billion in 2019. Buffett explains this away as Berkshire being unable to find attractive deals. He believes that many current business opportunities are overvalued. Consequently, Berkshire’s investment in new businesses has also reduced. The recent sales of his newspapers, as well as substantial shareholdings (as high as 10%) in major US airlines, United, Delta, American and Southwest means that Berkshire’s cash war chest just gets bigger.

Last year Buffett admitted that an investment option for Berkshire was to buy back it’s own stock. He hinted that this would be considered subject to buying the stock well. So far $1.7 billion had been spent buying back BH shares but that all stopped on March 10, 2020. With so many factors creating uncertainty Buffett remains a spectator until those raft of $20-$50 billion deals flow through and represent fair market value to Charlie and him. When will that happen? In my opinion the answer will be once the key risks are understood. Buffett says of today’s climate that “the virus has created an enormous range of possibilities which are extraordinarily wide and difficult to understand”. So the answer for him lies in certainty and predictability. COVID19 and the damage it does to people’s health, the consequential damage to economies and inevitably trading relationships, all on a world stage is what Buffett is concerned about. 

So what signs do you look for to see how he is likely to move forward. We heard a lot about capital allocation and being ready to use capital where it would produce a return. We also heard that capital should not be used to save a business suffering losses, hence Berkshire parachuting out of airlines. We heard a lot about litigation around insurance policies. Buffett is expecting that whilst Berkshire hasn’t carried much pandemic insurance that it is likely that companies will seek compensation for being shutdown. As the insurer he sees the defence of these claims as very expensive. Clearly many of the operating businesses will be impacted by reduced revenue conditions which point downwards on values. In my opinion Buffett is a buyer but first he wants to understand the new norm of the market and whilst conditions are negative and difficult to read his time will be spent managing existing holdings and repairing them whilst watching for opportunities. I suspect that we could see little happen this year as we wait to see what governments will do once their guaranteed support via social security around employees and employers is exhausted. This might also explain Berkshire’s substantial holdings in the US banks. It will most certainly be the government and the banks who see the first signs of stress. Berkshire’s capacity to buy good but troubled businesses will be a common solution as these groups look to solve big problems.

So is hoarding US $137 billion in cash wise? Well, it is to Berkshire Hathaway and in Australia Macquarie Bank have amassed AUD $20 billion in what they refer to as “dry powder”. It seems for these two companies cash is popular again. 

In my next story I will look at where Berkshire’s money is, Buffett’s important life lessons, the importance of protecting capital and where that capital might be headed. In a story to follow the next one I’ll also look at Berkshire Hathaway and property and if Buffett and Munger even rate it.