- Warren Buffett’s Berkshire Hathaway has $80 billion to spend, but very little to buy.
- The investor’s company is struggling to find stocks or businesses at attractive prices.
- Buffett has ended up investing in “so-so” stocks that he’s not happy owning.
Warren Buffett has an unusual problem. His wallet is stuffed full of cash, but he’s struggling to spend it wisely in one of the most expensive markets in history.
The famed investor’s Berkshire Hathaway conglomerate had over $140 billion in cash and short-term investments at the end of March. Buffett said he was looking to spend more than half of that figure at Berkshire’s recent shareholder meeting.
Yet Buffett and his team have sold $18 billion of stock on a net basis over the last nine quarters, excluding their $10 billion purchase of preferred stock in Occidental Petroleum to finance its merger with Anadarko Petroleum in 2019.
Moreover, Berkshire has only spent $4.3 billion on acquisitions since the start of 2019, and most of that went towards buying Dominion Energy’s natural-gas assets last summer. Buffett appeared to rule out an “elephant-sized acquisition” anytime soon at Berkshire’s recent meeting, blaming a horde of competitors that are willing to pay more.
“It is fair to conclude that Warren, Ted, and Todd have struggled for quite a while to identify attractive opportunities in the public markets,” James Shanahan, a senior equity analyst at Edward Jones, told Insider. He was referring to Buffett’s two portfolio managers, Ted Weschler and Todd Combs.
One of Buffett's strategies to deploy cash without overpaying was ramping up stock buybacks to a record $25 billion last year. However, Berkshire only spent $6.6 billion on share repurchases last quarter, down from about $9 billion in each of the previous two quarters.
That could mean Buffett no longer sees his own company's stock as a bargain anymore. After all, Berkshire "B" shares have surged by about 25% to a record high this year.
Buffett refuses to overpay
Other CEOs, under pressure to put cash to work, might have lowered their standards and struck suboptimal deals just to keep the baying crowds at bay. However, Buffett's investment philosophy centers on buying assets below their intrinsic value and staying within his circle of competence. In other words, he hunts for bargains and sticks to businesses and industries he understands.
That investment style is tricky when rock-bottom interest rates and trillions of dollars in federal stimulus have pushed investors into stocks and driven up asset prices. Moreover, scores of special-purpose acquisition vehicles (SPACs) and cash-rich private equity firms are scrambling to make acquisitions with little regard to price.
"It's really limited Buffett's opportunity, he's priced out," Paul Lountzis, president of Lountzis Asset Management, told Insider. "He really prospers when there's illiquidity, when people don't have access to capital."
On the other hand, if the stock market crashes and money dries up, Buffett would be perfectly placed to profit. "Keeping all this cash may turn out to be a blessing in disguise," Lountzis said.
Facing a big dilemma
Berkshire's lack of spending in recent years suggests that Buffett is being disciplined, Shanahan told Insider. "I do not see much evidence at all that Berkshire has been chasing highly valued investments or stretching to identify opportunities," he said.
However, if Buffett doesn't buy stocks, or businesses, and also cuts back on buybacks, Berkshire's cash pile will swell to new heights, Shanahan added.
Bill Smead, head of Smead Capital Management, summed up Buffett's problem to Insider: "He can't 'shoot fish in a barrel' and he can't hold too much cash, or he'll lose some of his investor base."
Simply put, Buffett's dilemma is whether he sticks to his guns and lets his cash pile grow, or betrays his core principles for the sake of deploying some money. He's arguably compromised already by buying "so-so" stocks that he lacks any special insight into, and therefore isn't too comfortable holding. Buffett made that surprising admission at Berkshire's recent meeting.
Lountzis, who carried out research projects for Buffett in the 1990s, told Insider that the questionable stocks might be the five Japanese trading houses and four pharmaceutical companies that Berkshire invested in last year. Buffett may have bought a basket of stocks in both cases because he wasn't familiar enough with them to choose a single winner, Lountzis said.
Unless conditions in the US change significantly, Buffett may have to continue looking overseas for bargains.
"I'm a little surprised he hasn't utilized much of Berkshire's cash pile, given that the recession is over and there are some attractive value stocks out there on a global basis," John Longo - a finance professor, portfolio manager, and the author of "Buffett's Tips: A Guide to Financial Literacy and Life" - told Insider.
Buffett is being pulled in two directions - by Berkshire shareholders clamoring for him to buy stocks and acquisitions, and his own reluctance to sit on too much cash; and by his fundamental desire to pay a fair price and own things he understands. He's also dissatisfied with the middle ground of owning so-so stocks. It'll be fascinating to see whether he's dragged one way or another, or comes up with a solution to his problem.