Warren Buffett's failure to pay too much pays for his frustration at spending a lot of money.
With shares at record highs, Berkshire Hathaway sold $ 1 billion worth of stock than it bought last quarter, and its largest online sales since the end of 2017.
Last year, Buffett used to build a massive stake in Apple and East Billions on investments in the largest US banks. This year's rally has not pulled him in.
Buffett has previously addressed the issue of cash piling up while waiting to strike, but never at this size. He has not had a major acquisition in several years and has even withdrawn in one of his newer ways of depositing cash, slowing the repurchase of Berkshire's own stock in the second quarter.
The result was that the company's cash portfolio ̵
"It would be difficult to look at the cash balance and the use of cash in recent quarters and not be disappointed that they have not bought any companies, they have not bought a lot of shares, and they have not bought back much of their own stock , "Said Jim Shanahan, an analyst at Edward Jones, in a telephone interview Saturday.
The growing pile is a reflection of the strength of operating businesses that Buffett has put together under one roof, and allows the billionaire investor's flexibility to move quickly when big deals
But he has acknowledged that having more than $ 100 billion to earn small returns for several years is weighing on the company's growth.
Buffett, 88, gained his legendary status by consistently outperforming the broader market, but Berkshire's total return has followed the S&P 500 for the past five, 10 and 15. There have been questions about whether Berkshire has grown too large to generate excess returns and whether the cash would have been better given back to shareholders than left for his eventual successor to pursue a bigger deal.
Buffett has tried to overcome these concerns and spent the last annual meetings and letters to shareholders that extended the value of holding Berkshire together as a conglomerate and maintaining the company's status as the first call for unique opportunities.
"Berkshire has been set up to be countercyclical, to have a war chest that could benefit from significant dislocations in the market," said Richard Cook, who oversees $ 330 million including Berkshire shares in Cook & Bynum Capital Management.
Buffett has been here before. In his letter to investors in 1998, he complained about $ 15. billions in cash that burned a hole in his pocket with "nothing on the horizon" in the form of good acquisitions or big stock games. Months later, while dot-com companies were furious and Berkshire's shares slipped, he bought a majority stake in the power utility MidAmerican Energy.
This agreement became the building block for the energy industry, which he now refers to as one of the two "redwoods" in the most valuable part of Berkshire's forest. It also delivered the executive director – Greg Abel – who many consider the front runner to be his successor.
Buffett again faced a record high of $ 43 billion at the end of 2004 after saying he "knocked out" on several multi-billion dollar purchases. At that time, the level remained relatively consistent until 2008, when financial markets collapsed and Berkshire went to work, loaning billions to Goldman Sachs Group Inc. and General Electric Co.
Now, the question for investors is how long is Buffett willing to wait to find reasonable opportunities. After holding more than $ 100 billion in cash since the end of 2017, he pulled the trigger on several share buybacks last year, a route he had avoided during Berkshire's history. While considering buying back in 2000 when Berkshire's Class A shares dipped below $ 45,000, he eventually delayed any move.
"Long-term, just relying on them has really proven to be the right strategy," Paul Lountzis, president of Lountzis Asset Management who oversees more than $ 200 million including investment in Berkshire shares.
“Very few people would have the courage to be CEOs of companies to sit around and be patient as they are. He can afford to do it based on the track record. ”
Some of the cash pile will soon be put into operation. Berkshire agreed to inject $ 10 billion in preferred equity into Occidental Petroleum Corp. to help fund an acquisition of Anadarko, a deal that will be completed if Anadarko shareholders approve the merger later this month.
Last year, Buffett said the deal prices were too high for his liking, so he spent more than $ 15bn on Apple shares. He also merged banks and airlines, but shares in many of these companies are now close to the 10% ownership limit, which he said he prefers not to cross. He even passed this level with his stake in Bank of America Corp. last month.
While Buffett's preference over recent years has been to acquire operating companies, his increased stake in large public companies has helped him trim the cash level, Lountzis said.
"If he hadn't, the cash on the books would just be scary," Lountzis said.
Berkshire's $ 400 million buyback in the quarter was down from $ 1.7 billion in the first three months of this year. This figure fell below the $ 1.5 billion expected by Barclays analysts.
Berkshire's board changed buyback policies last year as another way to distribute the mammoth pile, but Buffett has kept buybacks relatively limited, buying just a total of $ 3.4 billion since the policy was refined. JPMorgan Chase & Co., the closest financial firm to Berkshire in market value, has repurchased around $ 20 billion at that time.
The stock market's March higher limits Buffett's opportunities, but it has pushed his equity portfolio to over $ 200 billion in value and driven higher earnings. New accounting rules lead to unrealized gains being included in profits, so the company's $ 7.9bn in investment gains propelled net income to jump 17%.
There are other tangible benefits for the company with higher markets, in addition to the gain on the stock. portfolio. Berkshire had almost $ 1 billion in gains in the first half of 2019 on put options it wrote on multiple stock indices more than ten years ago, nearly half of which expire this year.
Still, investors do not reward Berkshire for stock games that pay off. While the S&P 500 has increased 17% this year, Berkshire's A shares are exactly unchanged.