Warren Buffett is considered one of the best investors of all time and his track record confirms that.
Since taking control of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) in 1965 he managed to increase the value of the company by 4,974,948%. That’s a practically incomprehensible number, so I’ll rephrase it: If you had invested in Berkshire Hathaway when Buffett took over, you would have more than 138 times as much wealth as if you had simply bought and held the stock. S&P 500.
Buffett spun Berkshire Hathaway out of a struggling textile company and turned it into a conglomerate with a huge insurance arm and stock portfolio at its core. Investors have been watching the changes in Berkshire’s stock portfolio closely for ideas from the Oracle of Omaha. But Buffett has been selling far more stocks than he’s buying lately.
There is one investment, however, that Buffett has been piling money into over the past year. Berkshire’s position in short-term U.S. Treasuries has grown by more than $58 billion over the past year, as Buffett financed new purchases with stock sales and cash flows from Berkshire’s core businesses. And he said he expects to add another $11 billion in the second quarter.
The only short-term investment Buffett likes
Buffett is known as a long-term investor. He is often quoted as saying “our favorite holding period is forever” when it comes to his best investment ideas for Berkshire. But not every investment should be held forever.
Buffett sees short-term government bonds as the best place to hold excess cash while he looks for good long-term investment opportunities. Virtually all of Berkshire’s money is invested in government bonds maturing within a year, most within six months.
Buffett explains in each quarterly report why he insists on keeping funds in short-term government bonds. “We continue to believe that maintaining adequate liquidity is of paramount importance and we insist that safety trumps returns with respect to short-term investments,” he wrote in Berkshire’s first quarter earnings report.
For now, he gets both safety and returns. Treasuries maturing within six months yield about 5.3% at the time of writing, more than a percentage point higher than the 10-year Treasury note. That is normally not the case. The inverted yield curve is the result of expectations that the Federal Reserve will cut interest rates in the coming years.
Buffett hasn’t always been a staunch advocate of short-term Treasuries. It’s a lesson he learned from experience. He bought long-term Treasuries in the 1970s and later felt the impact of inflation on the investment. “It was a mistake to buy 15-year bonds, and we did so anyway,” he wrote in his 1979 letter to shareholders. “We made an even more serious mistake by not selling them (at a loss, if necessary) when our current view began to crystallize.”
He would much rather take a lower yield and let the bond mature, then reinvest the proceeds at market rates, than gamble on where rates will be over the next 15 years. The fact that short-term bonds are currently yielding over 5% is just icing on the cake. At Berkshire’s 2024 annual shareholder meeting, Buffett said he’d still be in short-term Treasuries even if they yielded 1%.
Buffett will continue to buy
During his opening remarks at Berkshire Hathaway’s shareholders meeting in May, Buffett predicted that the company’s cash and treasury holdings would exceed $200 billion by the end of the second quarter, an increase of $11 billion from the end of the previous quarter.
“We would like to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money,” he said.
That’s hard to come by, especially since “big money” for Berkshire now means a lot more than it used to: its market value has ballooned to nearly $900 billion. “There are only a handful of companies left in this country that have the ability to really change the course of Berkshire,” Buffett wrote in his most recent letter to shareholders. And he won’t buy one unless it’s attractively priced and has a margin of safety.
Buffett has managed to add small amounts of some big companies over the past year. He recently took a big stake in Fattythe insurance company. He continues to increase his stake Occidental petroleumAnd Berkshire is also buying large amounts Liberty SiriusXM prior to the merger with Sirius XM later this year.
But those purchases are relatively small compared to the amount of free cash flow Berkshire Hathaway’s core operations generate each quarter. And with Buffett selling some shares to take profits and take advantage of currently favorable tax rates, the cash keeps piling up.
Berkshire is now more prepared than ever to strike when an opportunity presents itself. It could have an opportunity to buy all or part of a great company if the country faces an economic recession, or if more acute forces push down specific sectors. In the meantime, an additional 5% return on $200 billion is a nice way to add $10 billion per year to Berkshire’s net income.
You don’t have to follow Buffett when it comes to government bonds, you can just buy Berkshire stock.
With shares trading at 18.7 times forward earnings, Berkshire Hathaway stock looks attractive. That’s especially true when you consider its massive cash position, Buffett’s penchant for share buybacks, and his belief that Berkshire’s current group of businesses has “better prospects than most large American companies.”
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett added $58 billion to this ultra-safe investment in the past year and he expects to add tens of billions more by the end of 2024, originally published by The Motley Fool
