What happens if markets don’t crash soon?

[SwedishValue]

I figure most people responding here have some sort of position in Berkshire and also huge respect for Warren Buffett. I certainly fit this category.

 

Buffett has commented that prices are sky-high for his type of deal. The 20% draw-down at the end of last year was not sufficient for Buffett to become a net purchaser of stocks. Although we know Buffett was in the talks for a deal, we don’t know how close or big the deal was.

 

What if interest rates stay low and corporate America continues to advance at a moderate pace, with no significant downward movement in the stock market. Are Berkshire shareholders better off for having Buffett pile on hundreds of billions of cash, waiting for the extreme opportunity that would make him able to deploy it all at once?

 

Is a crash so inevitable and significant in nature that all waiting will be worth it?

 

Mr. Munger has commented that Berkshire has been run rationally up until now, and that it would make no sense to start acting irrationally at the end of the their tenure.

 

Is the inaction of Berkshire a plan in itself, to show an apparent commitment to mismanagement of shareholder capital, so that Buffett will have the option of significant buybacks at extremely distressed prices?

 

Would -anything- you see change your mind about the godly capital allocation skills of Mr Buffett? Seeing the inaction in securities he liked at lower prices, where volume has been readily available (JPM, BRK), I have a hard time considering the recent 5 years as a period where Buffett has shown good stewardship of shareholder capital.

 

Thankful for your thoughts, especially those backed by data.

[KFS]

Yeah, at this point, with hindsight 20/20, I'd imagine Buffett would agree with you that his stewardship of capital has not been ideal.  However, that being said, I'm not ready to proclaim that he was wrong in doing so over the past few years, with no crystal ball available to show him the future along the way.  Below is a transcript from the 2017 annual meeting afternoon session...  He literally said, "There’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it."

 

 

 

2. Pressure to deploy Berkshire’s cash grows as it nears $100B

WARREN BUFFETT: Jay?

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion.

Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share repurchase threshold?

WARREN BUFFETT: Yeah, the — when the time comes — and it could come reasonably soon, even while I’m around — but [if] we really don’t think we can get the money out in a reasonable period of time into things we like, we have to reexamine then what we do with those funds that we don’t think can be deployed well.

And at that time, we’d make a decision. And it might include both, but it could be repurchases. It could be dividends.

There are different inferences that people draw from a dividend policy than from a repurchase policy that, in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in.

But if we really — if we felt that we had cash that was unlikely to be used — excess cash — in a reasonable period of time, and we thought repurchases at a price that was still attractive to continuing shareholders was feasible in a substantial sum, that could make a lot of sense.

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But at a point, the burden of proof is definitely on us.

I mean, that — I — the last thing we like to do is own something at a hundred times earnings where the earnings can’t grow.

I mean, we’re — as you point out, we’ve got almost a hundred billion — it’s $90-plus billion invested in a business, we’ll call it a business, where we’re paying almost a hundred times earnings. And it’s kind of a lousy business.

CHARLIE MUNGER: It’s more after after-tax earnings.

WARREN BUFFETT: Yeah. So, it — you know, we don’t like that. And we shouldn’t use your money that way for a long period of time. And, then, the question is, you know, are we going to be able to deploy it?

And I would say that history is on our side, but it’d be more fun if the phone would ring instead of just relying on history books.

And, you know, I am sure that sometime in the next 10 years — and it could be next week or it could be nine years from now — there will be markets in which we can do intelligent things on a big scale.

But it would be no fun if that happens to be nine years off. And I don’t think it will be, but just based on how humans behave and how governments behave and how the world behaves.

But like I say, at a point, the burden of proof really shifts to us, big-time. And there’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it.

Charlie?

 

 

CHARLIE MUNGER: Well, I agree with you. The answer is maybe. (Laughter)

WARREN BUFFETT: He does have a tendency to elaborate. (Laughter)

[SwedishValue]

That transcript is part of the reason for my frustration. He thought JPM and BRK itself was cheap, so he bought some. But he only bought to offset something like 20% of the operating cash flow, although shares of both securities was trading at very attractive levels for a long time.

 

I think that there is a very high probability (over 90%) that Buffett will have more than 150 billion in cash within the next year. What does he even mean when he says the burden of proof shifts on them, big-time? Is there real meaning to these words?

[Lemsip]

As someone with almost a 50% position in Berkshire, I agree that the capital allocation in the last 5 years has been sub-par and frustrating to an extent.

Since the end of 2014 -

Cash has doubled from 58 to 116 billion ( not 128 as reported in the media)

Operating earnings generated and retained have been 93 billion ( virtually all cash)

About 37bn of this capital has been deployed in sizeable new deals  -  $22b for PCP ( rest by debt) , $5b new commitment to KHC and  $10b in OXY preferred.

PCP has been subpar as earnings seem to be static since 2015, KHC has been a disaster and OXY should work out OK but is unlikely to move the needle at Berkshire.

 

His straight equity deals have been better with exiting IBM, loading up on Apple and building a JPM position basically looked good.

 

Buybacks in size - as in 2011- have been an opportunity missed due to thumb sucking and overly complicated self imposed rules.

 

I think at the current price, Berkshire continues to be safe and bullet proof but I am not comfortable with a move to a market timing operation of hoarding cash sitting around waiting for a market event  when the allocation model is totally centralized to 2 90 year olds. Market timing is iffy at the best of times but especially if practised by a couple of guys for whom time is the one thing they have a decreasing amount of with each passing day. The next rung of capital allocators have no experience or track record of handling anything like the amounts of capital that will needs to be allocated if all earnings continue to be retained.

 

I do feel that one of the aspects that the market is not pricing is the possibility that allocation will become more rational post Buffett in that management will be less bound by self imposed constraints in returning capital to shareholders  via buybacks. New deals may also improve since the Buffett model of wait for the phone to ring will not work for others so that operation may need to be a bit more proactive.

 

These last 5 years have included 2 periods of weak markets - 2015 and 2018 and the 2018 plunge was pretty brutal so it is not as if it has been a market going straight up without any opportunities for rational buybacks in size or other purchases.

 

 

 

[scorpioncapital]

Yet it's also market timing if you buy up into a bubble hoping to unload before a crash. Not participating may be market timing but so is participating. Really it's not so much market timing as time arbitrage.

 

I remember the line that when rates are low you can afford to wait to get your profits later. When rates are high, you must get your profits immediately as the discount rate is so high. In other words at 1%, you can wait. But if rates are 10% and stocks are collapsing and bonds are yielding 10% you should put that money to work.

 

 

 

[DanielGMask]

“Once-in-a-lifetime” market extremes seem to occur once every decade or so - not often enough for an investor to build a career around capitalizing on them. But attempting to do so should be an important component of any investor’s approach. These words are from Howard Marks’ book The Most Important Thing.

 

Buffett has already build the greatest investment career ever so he may end up surprising everybody, as usual!

[Lemsip]

Yet it's also market timing if you buy up into a bubble hoping to unload before a crash. Not participating may be market timing but so is participating. Really it's not so much market timing as time arbitrage.

 

I remember the line that when rates are low you can afford to wait to get your profits later. When rates are high, you must get your profits immediately as the discount rate is so high. In other words at 1%, you can wait. But if rates are 10% and stocks are collapsing and bonds are yielding 10% you should put that money to work.

 

For Berkshire the key issue is not whether this is a bubble ( I personally don't see it at current interest rates and equity valuations). They key issue is with the amount of cash they have accumulated and lacking reinvestment opportunities, this is time to use for returning capital to shareholders. That  needs to be a far more important part of the allocation process than it hitherto has been. Certainly, most other money managers would not be afforded luxury the building up hundreds of billions of shareholder cash waiting for the phone to ring. 

 

Also, it is a myth that Buffett only invests when there are market dislocations. He wasn't particularly aggressive in 2008 ( focussing mainly on preferred fixed income type arrangements) nor in 1987 ( when he did nothing) or 1999. He was also totally inactive in Q4 2018 when the market dived 20% - a rare event. The key current capital allocation issues are size and shrinking universe and a hesitation to aggressively repurchase even when Berkshire has been cheap. Sitting on cash waiting for a future meltdown involves too much faith in specific future events and is also limited by Buffett's age and the lack of anyone else at Berkshire who can claim any experience allocating sums of this amount.

 

[woodstove]

If one owns a slab of the Rock of Gibraltar, there is little point complaining it makes a lousy surfboard.

 

I like what is called a Barbell portfolio -- instead of same-as average/middle (S&P Index?), balance positions of extreme safety (BRK?) and volatile upside/downside (petro-energy?).  If want excitement, surf on weekends, enjoy comfortable home/work life on weekdays.

 

Nowadays there is extreme volatility in contexts, so it makes sense for BRK to be prepared for opportunities.  Also to mention primary obligation, to preserve ability to pay out on insurance claims, and secondary obligations, to preserve capital of bondholders and shareholders.

[scorpioncapital]

I think Buffett once said we could have made trillions if we used leverage but that he didn't want to push the pedal to the metal. He said if you can get rich and have cash and sleep well why do you need to get ultra rich, and risk potentially a disaster?

[kab60]

I definately understand the frustration and impatience, but I recently took a 20 pct. position - first time since January 2016. The time is ticking, and if cash pushes towards 150B I'd expect a massive tender offer or an introduction of a dividend. The company is cheap, so if nothing happens, an investment should compound although at a lower rate than I'd prefer. But there's also an opportunity in a one-time gain/revaluation if Buffetts keeps his words. And I think he has a pretty good track record in that regard, so despite not blowing the lights out I think it's a crazy good risk/reward. I really don't see how one loses money longer term, and a large crash would actually be quiet favorable.

 

[CorpRaider]

He could just do a special dividend; doesn't have to create any expectation of recurrence.  I think having a lot of cash around may seem real smart if and when management changes.  A lot of people might panic out and big buybacks could be just the move.  Also, I've read cogent arguments that the cash size needs to be evaluated relative to the size of the float/balance sheet and focus on a nominal figure is not the best way to think about it.

[CassiusKing1]

[SwedishValue]

I’m not suggesting Buffett should swing for things he doesn’t understand or swing for things without margin-of-safety. I’m suggesting he should swings for the things he believes presents a margin of safety.

 

In addition to this, I’m posing the question if fellow shareholders are fine with ANY amount of wait. I am fine with it, as long as he swings when he gets the opportunity. However I feel like I, as a shareholder, deserve to know why he preferred waiting and allocating to cash, rather than buying more JPM and BRK stock when he believed both were undervalued and he had 20% of the market cap available in excess cash yielding historically low rates.

[woodstove]

Like most on this board, I am interesting in understanding why Mr. Buffett makes his (usually good) decisions.  However, I think it is a hazard if we ask him too much about his reasons, and especially if we get hung up on inconsistencies between explanations and actions.  He is essentially an artist, who has developed an understanding of business operations and valuations and their reflection via the markets, over many decades, to the point that he can usually make a yes/no/pass decision in maybe an hour when presented with an opportunity and the relevant data.  He may not understand all of the process, from opportunity and data to decision, himself.  My concern is that shareholder inquiries may cause him to anchor on his explanations, to do an expected action instead of the right one, or to pass on what seems right because it does not conform to previously stated standards (eg, famously, no airlines). 

 

A comparison -- on Gutenberg, there is a book by Rodin, entitled Art.  It was written by a friend of his, who visited Rodin regularly and discussed how he worked, how he made choices.  Most of the book is usual, though not uninteresting, but the last three chapters are outstanding.  Rodin says to his friend, come next time and I will show you.... The next visit, Rodin takes a lump of clay, makes a figure in the classical greek style, then makes another figure in Michaelangelo's style, and discusses the planes in the figures, the methods of capturing balance and motion.  Neither of which is Rodin's method, and the explanations he gives are not what Rodin or his colleagues exactly do, but it is interesting and instructive, even to a non-sculptor like me.  I would not want Rodin, through an excess of accomodation to his friend's curiosity, to change his manner of working.  A fascinating discussion of art, especially for me as I am a Rodin enthusiast.  But back to Buffett...

 

If one should figure out how Buffet makes investing decisions, it would be best, to benefit other shareholders, to keep it to oneself.  In fairness to the majority of shareholders, Buffett should keep his decision process to himself, except for appropriate interaction with colleagues.  We either trust him and the Berkshire team or we do not.  Let the guy work.

 

 

 

 

[Gregmal]

Like most on this board, I am interesting in understanding why Mr. Buffett makes his (usually good) decisions.  However, I think it is a hazard if we ask him too much about his reasons, and especially if we get hung up on inconsistencies between explanations and actions.  He is essentially an artist, who has developed an understanding of business operations and valuations and their reflection via the markets, over many decades, to the point that he can usually make a yes/no/pass decision in maybe an hour when presented with an opportunity and the relevant data.  He may not understand all of the process, from opportunity and data to decision, himself.  My concern is that shareholder inquiries may cause him to anchor on his explanations, to do an expected action instead of the right one, or to pass on what seems right because it does not conform to previously stated standards (eg, famously, no airlines). 

 

A comparison -- on Gutenberg, there is a book by Rodin, entitled Art.  It was written by a friend of his, who visited Rodin regularly and discussed how he worked, how he made choices.  Most of the book is usual, though not uninteresting, but the last three chapters are outstanding.  Rodin says to his friend, come next time and I will show you.... The next visit, Rodin takes a lump of clay, makes a figure in the classical greek style, then makes another figure in Michaelangelo's style, and discusses the planes in the figures, the methods of capturing balance and motion.  Neither of which is Rodin's method, and the explanations he gives are not what Rodin or his colleagues exactly do, but it is interesting and instructive, even to a non-sculptor like me.  I would not want Rodin, through an excess of accomodation to his friend's curiosity, to change his manner of working.  A fascinating discussion of art, especially for me as I am a Rodin enthusiast.  But back to Buffett...

 

If one should figure out how Buffet makes investing decisions, it would be best, to benefit other shareholders, to keep it to oneself.  In fairness to the majority of shareholders, Buffett should keep his decision process to himself, except for appropriate interaction with colleagues.  We either trust him and the Berkshire team or we do not.  Let the guy work.

 

I definitely agree with a lot of this perspective. I often laugh to myself at how hypocritical even myself can feel sometimes with various investments and angles because it is an art and something that is highly personal. Your framework for investing can be everything while also being nothing. It can be exact and also inexact. Something sometimes and nothing sometimes. It really does vary situation to situation. Just because something is the same as something that has worked before, doesnt mean that this time it won't be different, and vice versa.

[scorpioncapital]

Just look at your own portfolio. Do you go max aggressive? What if you're wrong? I gave up lots of gains by diversifying into say 10 major positions instead of 5 , and the ones I thought might do well sometimes did very well. Others didn't. It would be reckless to go max, especially if you have another asset in the field. E.g JPM when you got a ton of WFC and BAC and a ton of insurance cos which are also in the financial sector. Will you give up max return? Of course. But it's risk-adjusted return. And risk is the invisible variable. Seldom visible like a stock price.

[DooDiligence]

If one owns a slab of the Rock of Gibraltar, there is little point complaining it makes a lousy surfboard.

 

I like what is called a Barbell portfolio -- instead of same-as average/middle (S&P Index?), balance positions of extreme safety (BRK?) and volatile upside/downside (petro-energy?).  If want excitement, surf on weekends, enjoy comfortable home/work life on weekdays.

 

Nowadays there is extreme volatility in contexts, so it makes sense for BRK to be prepared for opportunities.  Also to mention primary obligation, to preserve ability to pay out on insurance claims, and secondary obligations, to preserve capital of bondholders and shareholders.

 

A little FOMO cash is a good thing in the right hands.

 

We'll see what results from glacial patience.