Why Warren Buffett now holds the equivalent of BP in cash

Arguably the greatest investor of all time now holds 60% of his portfolio in cash – equivalent to the market value of the second largest company in the UK. What does that tell you about markets?

22/03/2018
WarrenBuffett

Authors

Juan Torres Rodriguez
Fund Manager, Equity Value

Say we ran a poll, here on The Value Perspective, asking visitors to nominate their choice as the greatest investor of the last 20, 50, 100 years – it would be quite a shock if the name at the top of the list turned out to be anyone other than Warren Buffett.

That being so, then, why do more people not try and mimic the investment approach of the ‘Sage of Omaha’, buying whatever he owns in his portfolio?

This is a question we have addressed before in Sage advice II but we are revisiting it now after recently coming across a 2016 blogpost by US investor Meb Faber, seductively entitled How to beat 98% of all mutual funds.

In our own article, we pointed to a number of practical difficulties in trying to clone a Buffett portfolio and Faber also argues it is easier said than done.

One immediate plus, he  notes, is mirroring Buffett would be cheap because he operates a very low portfolio turnover – that is to say, he does not buy and sell stocks very often.

The challenge is sticking to your style

“So why don’t people simply follow along and ride his coattails?” asks Faber. “Because it’s hard,” he explains, adding Buffett is successful, not because he has “a magic stock wand” but rather an “unbelievable ability to stick to his style”.

“The challenge,” Faber goes on, “is sticking to your style and not selling at the worst time.”

To underline his point, he shows a clone Buffett portfolio outperformed the US market by an average of 4% a year between 2000 and 2015 – enough to beat 98% of all US mutual funds.

And yet, as Faber also points out, the clone portfolio underperformed the market in nine of the 16 years in the sample, including every year since 2012.

Value has had a tough decade

That is largely a result of value (the art of buying stocks which trade at a significant discount to their intrinsic value) as an investment style having underperformed for much of the last decade.

And while – for reasons we outlined in Sage advice II – Buffett’s approach to investing is arguably not as ‘pure value’ as it once was, this is still the person the market recognises as the benchmark for the discipline.

So, wonders Faber, at what point might you have fired the manager of your clone portfolio?

Copying Buffet is "boring" 

The other reason investors might not wish to mirror Buffett, Faber suggests, is it would actually be “boring” – after all, he tends to steer clear of the sort of stocks that are permanent fixtures in the media headlines, such as Facebook, Amazon and ‘exciting’ biotechnology businesses.

What is more, as we mentioned earlier, Buffett does not trade portfolio positions very often.That is something we very much have in common with Buffett, here on The Value Perspective.

People will often ask us (blurt out): “Then what do you do all day?” when we tell them how rarely we buy and sell shares. To which we will reply: “When there are fewer attractive assets to buy, value investors buy fewer assets.”

Still, whatever holds for The Value Perspective in that respect goes for Buffett in spades.

A shift to cash

In his most recent letter to the shareholders of his investment vehicle Berkshire Hathaway, Buffett revealed the amount of the portfolio held in cash or ‘short-dated’ (that is, more easily liquidated) US government bonds had risen from $86.4bn (£62.2bn) in February 2016 to $116bn now.

To put that in some sort of context, that equates roughly to a shift from Sri Lanka’s current total ‘gross domestic product’ (in effect, all the goods and services produced by a country) to that of Kuwait.

Or, if you prefer, a move from holding the entire market capitalisation of Starbucks to that of BP – with a billion or two to spare for a cup of coffee or a full tank of petrol.

“This extraordinary liquidity earns only a pittance and is far beyond the level Charlie [Munger, his vice chairman] and I wish,” Buffett writes.

“Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”

As things stand, however, one of the greatest investors of all time and a real advocate of value investing can identify so few attractively priced businesses to buy, or buy into, that he is keeping 60% of his portfolio in cash or equivalent assets.

What does that tell you about asset valuations?

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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value

Topics

Value
The Value Perspective
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