The man who is perhaps the greatest investor ever is silent and that should concern investors. Warren Buffett is the prime example of a long term, buy and hold investor who totally believes in the power of the US economy and the US stock market to grow wealth. Buffett’s net wealth was about $10,000 in the middle of the 20th century and today he vies with Jeff Bezos and Bill Gates for the title of the richest person in the world with more than $80 Billion in net wealth. Buffet would, in fact, be the richest person if he had not given away $34.5 Billion over the last few years! And, Buffett has made his money by applying the concept of intrinsic stock value. He looks for companies with the potential to grow and reliably produce income year after year. And, he looks for companies that are underpriced. Thus, over the years, Buffett has always been making investments and now he is not! We should pay attention to this silent warning for investors as it has implications for all of us.
Should You Hold Your Investments Forever, or Not?
Buffett has been quoted as saying that when he purchases stock in a strong company with strong management that favorite length of time to hold that investment is forever. And now, according to the most recent Berkshire Hathaway quarterly report, they are holding $122 Billion in cash while in normal times they would be holding something like $30 Billion. This is because in almost four years Berkshire Hathaway has not made any major stock purchases or acquisitions. And, in the first two quarters of this year, Buffett has be a net seller of stocks. The two parts of intrinsic stock value are the likelihood of a stock making money over the years and the current price of the stock, or any investment. What is happening with Buffett’s company is that they are not seeing any investments these days that combine growth and money-making potential with reasonable or low prices. This is the silent warning for investors.
Why Is Buffett Not Buying Back as Much Berkshire Hathaway Stock?
A third piece of the silent warning for investors is that Berkshire Hathaway has reduced its stock buybacks as well. Buying back your stock is done to increase share price and put excess cash to the best use possible. According to company reports, stock buybacks went from $1.7 Billion in the first quarter to $400 Million in the second quarter. We recently wrote about the potential dangers of stock buybacks. In the case of Berkshire Hathaway, the company has not been trying to artificially raise its share price and has rather been putting its cash to the best use. The fact that they are now keeping a large hoard of cash implies that the “better use” of this money will be in invest in the near future after a substantial market correction or even a crash. The likelihood of the trade war becoming permanent is such that smart investors will do well to hold a large amount of their portfolio in cash until the future becomes clearer and until the prices for stocks and other investments become more realistic.