Berkshire Hathaway's 2005 asset allocation:50% cash, 50% stock, up from 0%:100% 10 years ago
If Warren Buffet's not buying Stocks or Real Estate, why should you?"My hope was to make several multi-billion
dollar acquisitions that would add new and significant
streams of earnings to the many we already have," Buffett
confessed in this year's letter to Berkshire shareholders.
"But I struck out. Additionally, I found very few
attractive securities to buy..." (from report to shareholders)
Warren Buffet, the best investor in the western world
has been saving not investing for the last 10 years.
You should too.
Berskshire holds more in cash than in stocks.Back in 1994, cash was a nearly invisible asset class on
Berkshire's balance sheet, while equity investments
were equivalent to 128% of book value. But cash has
been piling up ever since, as the relative size of Berkshire's
stock investments has steadily decreased. In 2005,
for the very first time, Berkshire's cash exceeded the
stated value of its equity holdings. With the benefit
of hindsight, we see that Buffett was prudent to reduce
his equity allocation into the booming stock market of
the late 1990s, and was equally prudent to increase his
cash allocation as share prices fell from the 2000 peak.
"What Charlie and I would like is a little action now,"
Buffett writes in his annual letter. "We don't enjoy sitting
on $43 billion of cash equivalents that are earning paltry
returns. Instead, we yearn to buy more fractional interests
similar to those we now own or — better still — more large
businesses outright. We will do either, however, only when
purchases can be made at prices that offer us the prospect
of a reasonable return on our investment."
Warren Buffett boasted in Berkshire Hathaway's 1990
annual report, "Lethargy bordering on sloth remains the
cornerstone of our investment style: This year we neither
bought nor sold a share of five of our six major holdings.
The exception was Wells Fargo...We welcomed the (Wells
Fargo) decline, because it allowed us to pick up many more
shares at the new, panic prices...The most common cause of
low prices is pessimism - sometimes pervasive, sometimes
specific to a company or industry. We want to do business
in such an environment, not because we like pessimism but
because we like the prices it produces. It's optimism that
is the enemy of the rational buyer."
Buffett's aversion to optimism may also explain why he is
not dabbling in the real estate market either.
Buffet's not buying real estate either"Notice that Buffett is not investing in real estate,"
observes Susan Walker, in an insightful article for Fox
News, "an all-too-tempting alternative for regular folks
who have some money they would like to invest but who don't
trust the stock markets. In fact, as the most recent issue
of 'The Elliott Wave Financial Forecast' points out, many
people are 'now captivated by the concept of easy wealth
through real estate...According to the National Association
of Realtors, a stunning 25 percent of the 7.7 million homes
sold in 2004 were purchased strictly as investments.'"
Perhaps Buffett has observed sometime during his lifetime
that real estate prices – like stock prices – do not always
go up. Perhaps too, he has noticed that real estate prices
are already falling in some parts of the country.
"Total U.S. home sales dropped dramatically by 9.7 percent
from December 2004 to January 2005 (before revisions),"
Walker notes, "even as median sales prices on new U.S.
homes plunged 13% from $229,700 to $199,400. That decline
in the median sales price was the largest one-month fall in
the history of the data, which goes back to 1963."
"So here's the most under-asked question of the year,"
Walker concludes, "If Warren Buffet isn't putting Berkshire
Hathaway's money in stocks [or in real estate], can this be
a good time for anyone else to do it?"
(from the daily reckoning newletter Apr 2005)Nor does Buffet borrow"We are not interested in incurring any significant debt at Berkshire
for acquisitions or operating purposes. Conventional business
wisdom, of course, would argue that we are being too conservative
and that there are added profits that could be safely earned if we
injected moderate leverage into our balance sheet. Maybe so.
But many of Berkshire’s hundreds of thousands of investors have
a large portion of their net worth in our stock (among them, it
should be emphasized, a large number of our board and key managers)
and a disaster for the company would be a disaster for them....
To these and other constituencies we have promised total security,
whatever comes: financial panics, stock-exchange closures (an
extended one occurred in 1914) or even domestic nuclear, chemical
or biological attacks.
Whatever occurs, Berkshire will have the net worth, the earnings
streams and the liquidity to handle the problem with ease. Any other
approach is dangerous. Over the years, a number of very smart people
have learned the hard way that a long string of impressive numbers
multiplied by a single zero always equals zero. That is not an equation
whose effects I would like to experience personally, and I would like
even less to be responsible for imposing its penalties upon others. "
(2005 shareholders report, Berkshire Hathaway)
Conclusion:
1. Pay off your house
2. Put your money into savings
Augusto Hidalgo is a financial advisor licensed in the Province of Ontario.
He helps clients build tax free savings plans using their current debt payments.
