Warren Buffett. He is an icon to many, and a legendary, long-term value investor. Herein lies the conundrum regarding the Oracle of Omaha. His investment philosophy currently appears to be at odds with his actions.
The key to being a successful long term investor is that one needs to have all of their money working for them, all of the time – or nearly all of it. However, as far back as the first half of 2014, Buffett has been pulling the capital which he manages (on behalf of Berkshire Hathaway) out of markets, and particularly U.S. markets, in amounts never before seen in his entire investment career.
…Warren Buffett has never had so much money to spend.
Cash at his Omaha, Nebraska-based Berkshire Hathaway Inc. rose past $50 billion at the end of June, the first time it finished a quarter above that level since he became chairman and chief executive officer more than four decades ago.
Since that time; Buffett’s Berkshire Hathaway cash-hoard has soared to over $72 billion. But it could have been even more.
Buffett’s Berkshire Hathaway (BRK.A) recorded a total of $72.7 billion in cash at the end of June, up about 1% from the end of December despite this year’s $37 billion acquisitions of aerospace supplier Precision Castparts and battery-maker Duracell…
Four decades. That’s a long time. Seventy-two billion dollars. That’s a lot of money. When a long-term value investor is sitting with more “dry powder” than at any other time in his four-decade tenure, one can only ask “why?”
Warren Buffett is now 86 years old. Unless we are to believe that he plans on bequeathing the largest mountain of capital he has ever accumulated to his successor, Buffett is planning on going on the Mother of All Shopping Sprees, and he is planning on doing so soon.
Long-term value investors do not buy high. Behavior such as that is reserved for momentum-chasing chumps, with money to burn. Long-term value investors buy low. Warren Buffett’s actions tell us that he anticipates so many “bargains” all around him that he requires more buying-power than at any other time in his investment career.
Buffett’s preferred super-market for doing his shopping is the S&P 500. The S&P 500 currently sits above 2100 points, having more than tripled from its March 2009 low of 676.53. Those analysts who still remember the word are shouting “bubble.” But these are U.S. markets, where rules and rationality no longer seem to apply.
One of the surest harbingers of a market crash has always been an obvious peaking pattern in margin debt. According to this indicator, U.S. markets already “rolled over” – a full year ago – as proclaimed in this Bloomberg headline:
Margin Debt in Freefall Is Another Reason to Worry About S&P 500
Since its peak, total margin debt at the NYSE has fallen by approximately 20%. “Indicators” don’t get much louder than that. Yet here we are, one year later. The bubble in U.S. equity markets has continued to grow, but few people seem to care – except Warren Buffett. What does he know?
It’s hard to decipher this from what Buffett is saying, because he hasn’t been saying much. As recently as April of this year, he was pooh-poohing Carl Icahn’s warning that “a day of reckoning” was approaching in markets.
More revealing (once again) is to look at what Warren Buffett has been doing. A recent article did precisely this:
Over the last couple of years, Warren Buffett’s holding company, Berkshire Hathaway has been dumping its exposure to American stocks that rely upon consumer spending.
For example, at the end of the second quarter of 2012, Berkshire Hathaway held 10.33 million shares of Johnson & Johnson.(1) At the end of the second quarter of 2014, it held only 327,100 shares.(2) Over a two-year period, Buffett’s holding company sold off 96.8% of its holdings in Johnson & Johnson.
Berkshire Hathaway also culled its holdings in Kraft Foods Group, Inc. (NASDAQ/KRFT). In the second quarter of 2012, Warren Buffett’s holding company held 58,826,390 shares, two years later, it held just 192,666 shares. That represents a 99.7% sell-off. [emphasis mine]
Johnson & Johnson and Kraft Foods are market icons nearly on par with Buffett himself. Yet the Oracle of Omaha now deems these consumer bellwethers to be virtually radioactive. The U.S. has a consumer economy, and it seems that no one is more-bearish on the U.S. consumer than Warren Buffett.
Of course Buffet hasn’t only been selling over the past four years, he’s also been doing some buying. What does Buffett like, at a time when he doesn’t like much? The previously cited article, provides further guidance.
What stocks does Warren Buffett think will do well in a correction? Since the beginning of 2012, Berkshire Hathaway has increased its holdings in Wells Fargo & Company (NYSE/WFC) by 23%, U.S. Bancorp (NYSE/USB) by 23%, and still has a huge stake in American Express Company (NYSE: AXP).
Warren Buffett still likes banks, Big Banks, to be precise. No news there. Buffett’s ardent admiration for U.S. Big Banks borders on infatuation, even though these financial institutions are caught committing major felonies, on virtually a weekly basis.
Buffett is shunning consumer bellwethers, but still buying the Big Banks. As we look toward the Next Crash in U.S. equity markets, this might be a good time to look back at the last crash: the Crash of ’08. During that deep and frightening market/economic trough, it was a bad time for almost every sector – except big-banking.
The Crash of ’08 harkened in a whole, new era for U.S. (and Western) Big Banks: the institutionalized extortion euphemistically termed “too big to fail”. Give us all your money, or we’ll blow up the financial system.
The threat worked, spectacularly well, in 2008. U.S. Big Banks received $100’s of billions in up-front blackmail payments, with trillions of dollars more in future installments, in the form of “loss guarantees” and tax-breaks. This systemic extortion was extended, across the Western world, and now all of these felony-committing Big Banks are “too big to fail.”
Is Warren Buffett preparing for the Next Crash, as he bails out of U.S. consumer bellwethers, and loads up on Big Banks? If this is the case, he is certainly playing coy with the media. As recently as one month ago; Buffett was crowing about the current condition of the U.S. economy as being “pretty damn good”.
If investors choose to focus on what Warren Buffett is doing, they may be tempted to dump their equity holdings, and move their wealth into something genuinely secure – like precious metals. However, if they choose to focus on what Warren Buffett is saying, there doesn’t seem to be much to worry about.
For some people, the fact that Buffett’s words don’t match his actions may be the greatest cause for concern of all.
–Jeff Neilson
Read more at http://www.stockhouse.com/news/newswire/2016/09/16/warren-buffett-s-cash-hoard-what-does-he-know#v6QYXKGTqd4iiPkl.99
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