Does Warren Buffett Know Something We Don’t?

Summary

Podcast Summary: The Journal - "Does Warren Buffett Know Something We Don’t?"

Hosted by Ryan Knuza and Spencer Jacob, with insights from Jessica Mendoza, "The Journal" delves into the intriguing shift in Warren Buffett's investment strategy. This episode explores why the legendary investor is currently selling stocks and accumulating vast amounts of cash, challenging his long-held "forever hold" philosophy.

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1. Introduction: Warren Buffett’s Unprecedented Cash Hoarding

Timestamp: [00:05 - 02:16]

The episode opens with Ryan Knuza highlighting Warren Buffett’s unparalleled reputation in the investment world. At 94 years old, Buffett, through his company Berkshire Hathaway, has amassed a fortune surpassing a trillion dollars by adhering to a long-term investment strategy. Traditionally, Buffett's mantra has been to "hold forever," allowing investments to grow via compound interest. However, recent actions have deviated from this norm. Buffett is notably selling stocks and amassing an astonishing $325 billion in cash.

Notable Quote:

Ryan Knuza [00:05]: "His favorite holding period for a stock is forever."

Spencer Jacob adds perspective on the sheer scale of Buffett’s cash accumulation:

Spencer Jacob [01:05]: "He has built up cash and cash equivalents of $325 billion on the balance sheet of Berkshire Hathaway."

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2. Understanding Buffett’s Legendary Investing Strategy

Timestamp: [03:46 - 05:16]

Ryan and Spencer delve into why Warren Buffett is revered as a titan in investing. Buffett’s success is not attributed to luck but to a 70-year track record of disciplined investing. By acquiring quality companies and maintaining these investments over long periods, Buffett has harnessed the power of compound interest. Since taking over Berkshire Hathaway in 1965, Buffett has consistently outperformed the S&P 500, achieving an average annual return of 20% compared to the S&P’s 10%.

Notable Quote:

Spencer Jacob [04:21]: "Over decades, the key to Buffett's success has been to pick the right companies to invest in and then hold on to those investments for a long time."

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3. The Current Shift: Selling Stocks and Accumulating Cash

Timestamp: [05:42 - 08:50]

Contrary to his long-term holding strategy, Buffett has been selling significant positions in major companies like Apple and Bank of America over the past few quarters. This unexpected move has sparked widespread speculation about his motives. The central question arises: Why is Buffett, a proponent of long-term investments, now hoarding cash?

Spencer suggests that this behavior might indicate Buffett's concern about the current market's valuation. Historical patterns show that Buffett has previously sold stocks when he believed the market was overvalued or before economic downturns, such as the tech bubble burst in the 1990s and the 2008 financial crisis.

Notable Quotes:

Spencer Jacob [07:42]: "He just sees the market is too expensive. Something, the pendulum has swung really far one way, then it's got to swing back the other way."

Ryan Knuza [05:42]: "Which is why it's so surprising that Buffett has been selling stock from big companies like Apple and Bank of America."

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4. Potential Reasons Behind Buffett’s Cash Accumulation

Timestamp: [06:31 - 09:24]

The discussion shifts to possible explanations for Buffett’s current strategy. Various theories are considered:

• Estate Planning: Speculated by listeners, but Spencer clarifies that Buffett intends to donate over 99% of his wealth to charity, making this unlikely.
• Economic Concerns: Inflation worries, potential tax hikes on capital gains, or political uncertainties like presidential elections could be factors. However, Spencer notes that Buffett typically does not let short-term events influence his long-term strategy.

Instead, the consensus leans towards market valuation concerns, with Buffett possibly anticipating a market correction or downturn due to overvaluation. This sentiment is echoed by external analyses, such as Goldman Sachs forecasting a modest 3% annual return for the S&P 500 over the next decade, a stark contrast to its previous 13% average.

Notable Quotes:

Spencer Jacob [07:05]: "Maybe he was hedging his bets because of the election, or maybe he was concerned about inflation... but I don't think that has anything to do with him because it's also short term."

Spencer Jacob [09:24]: "Goldman Sachs recently came out... they said, we think that the stock market over the next decade... is going to return 3% a year."

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5. Where Is Buffett’s Cash Located?

Timestamp: [09:53 - 11:11]

A significant portion of Buffett’s amassed cash resides in U.S. Treasury bills, renowned for their safety and liquidity. While Treasury bills yield roughly 4.5% interest—substantially lower than Buffett’s historic 20% annual returns—they offer a secure haven for such vast sums, ensuring that the capital is readily accessible if needed.

Notable Quote:

Spencer Jacob [09:53]: "Where Warren Buffett keeps that cash, it is primarily in U.S. treasury bills... It is the safest and most liquid investment in the world."

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6. Implications for Everyday Investors

Timestamp: [12:18 - 14:46]

Spencer addresses the broader implications of Buffett’s strategy for regular investors. The key takeaways include:

• Avoid Emulating Buffett's Cash Accumulation: Selling all investments to hoard cash is generally unadvisable for everyday investors.
• Diversification: Investors might consider diversifying their portfolios rather than concentrating investments in the same stocks that are popular among others.
• Market Valuation Awareness: Recognizing when markets are overvalued can be beneficial, but timing the market is notoriously challenging.

Notable Quotes:

Spencer Jacob [13:52]: "Maybe you should temper your expectations as well... you do need to invest your money in something."

Ryan Knuza [13:45]: "So are you sort of saying that Warren Buffett has gotten too big for his buy and hold forever strategy to work anymore?"

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7. Conclusion: Navigating the Future of Investing

Timestamp: [14:46 - End]

The episode wraps up by reinforcing that while Warren Buffett’s actions are noteworthy, they may not be directly applicable to the average investor. Buffett’s unique position and resources afford him strategies that may not be feasible for others. However, his emphasis on cautious investment and market awareness serves as valuable guidance.

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Final Thoughts: Warren Buffett’s current accumulation of cash amid selling major stock holdings marks a significant departure from his established investment philosophy. While his actions may signal concerns about market valuations and future economic conditions, everyday investors are advised to focus on diversification and long-term growth rather than attempting to mirror Buffett’s strategies.

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For more insights and detailed discussions on money, business, and power, subscribe to "The Journal" on Spotify or your preferred podcast platform.

Transcript

[Ryan Knuza]

Warren Buffett is probably the most famous investor alive. His company, Berkshire Hathaway is worth more than a trillion dollars. And the way he's made all that money is by playing the long game. When he buys shares of a company, he tends to stay invested. He once said that his favorite holding period for a stock is forever. But Recently Buffett, who's 94 years old, has been getting attention for doing something that's totally out of character. He's selling stocks and hoarding giant piles of cash.

[Spencer Jacob]

His cash level is extraordinary today.

[Ryan Knuza]

That's our colleague Spencer Jacob.

[Spencer Jacob]

He has built up cash and cash equivalents of $325 billion on the balance sheet of Berkshire Hathaway.

[Ryan Knuza]

Wow. Like, if you were to stack up all these $1 bills, 325 billion $1 bills. Like, does that get you like close to the moon? Like, does it. Can you paper over the entire planet Earth with all this money?

[Spencer Jacob]

Yeah, I think it gets you if you them end to end. I have not done the measurement. I think it gets you to the moon or the sun or something crazy like that. And I mean, you know, you imagine like Warren Buffett sitting in a bunch of money or gold or whatever, or Scrooge McDuck diving, right?

[Ryan Knuza]

Diving off a die board into a swimming pool of which, by the way, you would hurt yourself. That would hurt. You wouldn't die.

[Spencer Jacob]

Yes. Do not attempt this. Just disclaimer. Do not.

[Ryan Knuza]

It does not move like water.

[Spencer Jacob]

Do not attempt at home, kids. But $325 billion, it's a tremendous amount of money. It's enough to buy all but the 24 or 25 largest US listed companies. You know, he could buy Boeing and AT&T and have cash left over. And so it has people scratching their heads.

[Ryan Knuza]

Scratching their heads because why is the guy who likes to invest forever holding on to $325 billion in cash?

[Spencer Jacob]

And that has people very interested and a little bit concerned about what he might think about the state of the market and the global economy.

[Ryan Knuza]

Welcome to the Journal, our show about money, business and power. I'm Ryan Knuza. It's Wednesday, Novemb 13th. Coming up on the show, why is Warren Buffett hoarding all this cash?

[Unknown]

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[Ryan Knuza]

Why do people care so much about Warren Buffett? Like, why is he just why is he such a big deal as an investor?

[Spencer Jacob]

Warren Buffett is a remarkable investor. Warren Buffett is not just lucky. He has such a long track record, the 70 year track record that we can document of his investing. And obviously not every year has been a resounding success. But compounded over those years, no one has done it as well. And no one has done it for as long as Warren Buffett has.

[Ryan Knuza]

Buffett started investing when he was a kid. He eventually bought a rundown textile manufacturing company called Berkshire Hathaway, and he used it to buy other companies and invest in the stock market. Over the decades, the key to Buffett's success has been to one pick the right companies to invest in and and then two hold on to those investments for a long time and let the magic of compound interest do the rest.

[Spencer Jacob]

Compound interest is basically making money and then making money on that money, and then making money on that money and making money on that money. And it can turn into a gigantic difference at the end.

[Ryan Knuza]

Since 1965, when Buffett took over Berkshire Hathaway, the S&P 500 has made 10% a year on average. Buffett, on the other hand, has made 20% a year on average. And thanks to the power of compound interest, that difference is way bigger than it sounds.

[Spencer Jacob]

If you had invested in Berkshire Hathaway when he took it over in 1965, today you would have made 140 times as much as an investor who just bought the standard and poor's 500.

[Ryan Knuza]

Here's Buffett talking about compound interest in a documentary.

[Spencer Jacob]

It's a pretty simple concept, but over time it accomplishes extraordinary things.

[Ryan Knuza]

The longer you hold onto a stock, the more time that compound interest can work. Which is why it's so surprising that Buffett has been selling stock from big companies like Apple and Bank of America.

[Spencer Jacob]

It'S been the last two or three quarters that Berkshire Hathaway has been selling down its positions. So Berkshire Hathaway was building up cash. He has sold down two of his largest shareholdings, not to zero, but tens of billions of dollars of each of these holdings.

[Ryan Knuza]

Buffett hasn't said exactly why he's doing it. Is it possible that his decision to take this money out of the stock market has something to do with just where he is in his own life? I mean, he's 94 years old, obviously nobody lives forever. Could he be thinking about, could that be a factor in what he's doing right now?

[Spencer Jacob]

I got so many reader emails and comments saying, does this have to do with estate planning? Maybe it's a smart estate plan strategy, and then he has more cash to leave to people. That's actually not the case at all because he is going to leave more than 99% of his money to charity in the form of Berkshire stock. So whether Berkshire has a lot of cash or has no cash, does that matter?

[Ryan Knuza]

Do you think that Warren Buffett's cash hoarding might have something to do with the presidential election and who he thought might win?

[Spencer Jacob]

Yeah, it's been suggested to me in reader comments and some smart reader comments. Well, maybe he was hedging his bets because of the election, or maybe he was concerned about inflation, or maybe he sold all these stocks because he reckoned that capital gains taxes would rise and so he wanted to lock in a lower rate. And I'm going to say, based on my knowledge, I don't think that the economy or taxes or capital gains or anything like that, or even an election or who sits in the White House has any effect on him because it's also short term.

[Ryan Knuza]

But even though Buffett isn't saying exactly why he's doing this, Spencer says his track record offers some clues. Back in the 1960s, Buffett sold off a lot of stock when he thought the market was overvalued. In the 1990s, Buffett also became cautious just before the tech bubble burst, and he sold stocks again just before the 2008 financial crisis. Notice a pattern there? So if the only times he's pulled out of the market in the past is in the lead up to a recession or a market downturn, does that mean he thinks we might be headed for another one?

[Spencer Jacob]

Well, he hasn't said anything to that effect, and there isn't a lot of evidence that we're on the precipice of a recession. But there's widespread thinking among People who follow him that he just sees the market is too expensive. Something, the pendulum has swung really far one way, then it's got to swing back the other way. You just don't know exactly when.

[Ryan Knuza]

But even if there isn't a recession, some Wall street analysts say the stock market is overpriced, which might mean growth could slow down significantly over the next few years.

[Spencer Jacob]

So Goldman Sachs recently came out, and this got a lot of attention. They said, we think that the stock market over the next decade, the s and P500, which is the main stock index, is going to return 3% a year.

[Ryan Knuza]

By comparison, the S and p has averaged 13% over the past decade.

[Spencer Jacob]

People are like, what are you, crazy? 3% a year? You know, what are you smoking? But that is consistent with some other measures out there. Vanguard, for example, sees growth stocks returning even less than that.

[Ryan Knuza]

So if his money isn't in the stock market, what is Buffett doing with all that cash? That's next. Where does one even keep $325 billion? I mean, you're obviously not stuffing it in a mattress, but, like, spreading it out over different bank accounts. Like, where does he actually put all that money?

[Spencer Jacob]

Yeah, it is not in a bank. So you don't have to worry about a bank going bankrupt or being robbed or something. Where Warren Buffett keeps that cash, it is primarily in U.S. treasury bills. If Warren Buffett tomorrow decides he needs cash, he could sell $100 billion of treasury bills. It is as good as cash.

[Ryan Knuza]

And it's also safer. Right, because this is the US Government. You're not likely to lose your money because the US Government has a history of always paying its bills.

[Spencer Jacob]

That's right. It is the safest and most liquid investment in the world. It's not the most profitable investment in the world, but at the moment, they're paying a decent interest rate.

[Ryan Knuza]

US treasury bills are earning Buffett roughly 4.5% interest, but it's a far cry from the 20% he's made annually on average, during his career. I mean, four and a half percent or so. On $325 billion, that's still a lot of money coming in.

[Spencer Jacob]

That is a lot of money. But on $325 billion, you're talking about 15, $16 billion a year, which for you or me is a lot of money.

[Ryan Knuza]

I take 15 or 16 billion dollars a year.

[Spencer Jacob]

I take it, too. I think I'd settle for that.

[Ryan Knuza]

But Buffett doesn't seem to want to settle for that.

[Spencer Jacob]

He's spoken many times about why he likes to have a lot of cash. He likes to have dry powder for opportunities. But he's also on the record and pretty recently that he would like to do a big deal. You know, he's asked pretty much every year, especially since he's had this large amount of cash. What are you going to do with this cash? What are your plans? And I mean, he's just saying, I'd sure love to do a deal. 50, 75, $100 billion deal. He's called an elephant. He'd like to go and bag an elephant.

[Ryan Knuza]

The perfect elephant is a big healthy company that he can buy for a decent price. The problem is that right now there doesn't seem to be a lot of good options.

[Spencer Jacob]

He has not hesitated to sit on the sidelines and just sit on that cash. And so he's very disciplined that way. And so that should concern all of us, just as people who have 401ks. Why is he not seeing good opportunities? What kind of returns does he foresee?

[Ryan Knuza]

What does it mean If Warren Buffett is looking out at the world of investing opportunities and says nothing out here looks good to me, he now manages.

[Spencer Jacob]

So much money that he has to make very large investments and he only can buy very large companies. And I think the question really is like, can Warren Buffett do 20% a year in the future? And he probably can. And there's two reasons for that. One is that markets are not really well priced to deliver outstanding returns today over the next decade because markets are very expensive. And so the more expensive things are, the less prospective return that you have. But the other thing is that he just can't double the market's return anymore because he has a trillion dollar company.

[Ryan Knuza]

So are you sort of saying that Warren Buffett has gotten too big for his buy and hold forever strategy to work anymore?

[Spencer Jacob]

Yeah, it's a high class problem that you have a lot of money and you can't double it. You can't buy a $100 billion company and then have it be worth a trillion dollars in a few years because that just doesn't happen. Right. So you'd have to be so, not just smart, but lucky for that to happen. And so he is reaching the limits of his ability to outperform the market. He already has reached it.

[Ryan Knuza]

So what's the takeaway, do you think, for everyday investors like the rest of us?

[Spencer Jacob]

I think the takeaway for everyday investors is not to sell everything and put it in cash, because that's almost always a mistake trying to time the market usually has poor results. You are not Warren Buffett. I think the takeaway for everyday investors is if he's cautious about the general level of stocks. Maybe you should temper your expectations as well. You know, you do need to invest your money in something. So maybe I want to, you know, put some more of my eggs in a different basket as opposed to the same stocks that everyone owns. I think that's a very practical takeaway. I think selling everything and sitting in cash is not a practical takeaway because it's never been a long term winning strategy. Warren Buffett's reasons for doing that should not be your reasons for doing that.

[Ryan Knuza]

That's all for today. Wednesday, November 13th. The Journal is a co production of Spotify and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.