Buffett prepared for inflation with cash position of 32.5% of liquid portfolio!

[nafregnum]

13 hours ago, longterminvestor said:

Mr. Buffett and Mr. Munger have always been quoted as saying "No company ever went out of business having too much cash", however they forgot to mention what to do in an inflationary environment.....Schiller P/E at these heights scares me for sure.  Where do you put money??  I just keep saying to myself, trust quality and invest in great businesses - things will be good over the long term.   

 

I've been working my way through Chris Bloomstran's yearly letter -- he said something on twitter about it being a little crazy that the market cap of Berkshire at 630B is basically the same as Tesla and also Bitcoin, and it got me interested to learn more about how he thinks.  The current Semper Augustus letter is 114 pages long and I'm almost finished -- I like his writing style, and it feels like at least half of the whole letter is dedicated to looking deeply at Berkshire (it's like a 31% position in his 260M portfolio according to 13Fs)  -- The thing I like most is to see Warren buying back shares a lot more than in previous years.  Chris gives the full history of previous share buybacks and other times when Warren used shares instead of cash because he saw the shares as "worth more" (overvalued vs cash) -- the GOAT (greatest of all time, WEB) successfully used the right tool for acquisitions in almost all cases, and only bought back shares when it was most rational to do so -- the fact that GOAT is buying back shares now makes me want to sell out of everything I hold which I believe to be "fully valued" or "overvalued" and put that all into BRK.B shares and go back to my usual inactivity.  The fact that he's repurchasing shares currently/recently is a big green light.  He at least makes an argument that the stuff selling at the highest Price/Sales multiples have a really hard time outperforming in the following 20 years (pages 53 to 56 or so if I remember)

 

https://www.semperaugustus.com/clientletter

 

 

[omagh]

On 6/15/2021 at 7:43 AM, wachtwoord said:

Why would you hold cash if you are expecting high inflation? Sounds like a larger hurdle to argue for holding cash as you'll need to overcome the loss of purchasing power implied by the higher inflation too.

 

@wachtwoord

 

https://lonecapital.com/wp-content/uploads/2017/09/e38090margin_of_safetye38091seth-a-klarman.pdf

Klarman often sits on 30-40% cash.  He has a vulture-like multi-year approach patiently waiting and looking for significantly mispriced assets.   His chapter 13 (starts at pg 219) on portfolio management walks through his framework.  It's simple, but brilliant thinking.  Holding cash is about managing duration and maintaining liquidity.  Portfolio management transcends the inflation question and begs the question of whether current asset prices are sufficiently priced in an inflationary environment.

 

An improved question would be "Why is Buffett maintaining upwards of 30% portfolio at zero-duration with full liquidity?" 

 

And "Why in the normal range of capital allocation options (1) purchase undervalued growth assets, 2) invest in internal growth, 3) repurchase shares) is Buffett allocating spare capital to share repurchases as a preference?" 

 

And "Are today's prices providing a sufficient margin of safety?"

 

And lastly "Why is Buffett preferring to hold sizeable amounts cash as an infinite duration call option on future asset prices and liquidity events?"

[spartansaver]

17 minutes ago, omagh said:

 

@wachtwoord

 

https://lonecapital.com/wp-content/uploads/2017/09/e38090margin_of_safetye38091seth-a-klarman.pdf

Klarman often sits on 30-40% cash.  He has a vulture-like multi-year approach patiently waiting and looking for significantly mispriced assets.   His chapter 13 (starts at pg 219) on portfolio management walks through his framework.  It's simple, but brilliant thinking.  Holding cash is about managing duration and maintaining liquidity.  Portfolio management transcends the inflation question and begs the question of whether current asset prices are sufficiently priced in an inflationary environment.

 

Funny you post this, I started rereading MoS the other day.

 

When you're inside a system it's hard to get a view from the outside. Rereading MoS is allowing me to see current times from an outside perspective. (hard to explain)

 

He's such a great thinker and a very modest investor. It's a rare combination.

 

 

[scorpioncapital]

You know if inflation was 10% and interest rates say 7% it would not be much different than today at say 3% inflation and 0% rate. Perhaps it is the difference between the repression of rates and inflation, the real rate of interest that matters. How wide was this gap in the 70s before Volker jacked up rates? Was it like 3% and 15%? It might matter as a comparison. It is this delta to watch perhaps. If it gets way out of hand you know there will be a jack up of rates at some point and a big crash since otherwise you get hyperinflation. Another possibility is just inability to launch, small recessions after recession as rates slowly go up. 

Edited July 21, 2021 by scorpioncapital

[omagh]

5 hours ago, scorpioncapital said:

You know if inflation was 10% and interest rates say 7% it would not be much different than today at say 3% inflation and 0% rate. Perhaps it is the difference between the repression of rates and inflation, the real rate of interest that matters. How wide was this gap in the 70s before Volker jacked up rates? Was it like 3% and 15%? It might matter as a comparison. It is this delta to watch perhaps. If it gets way out of hand you know there will be a jack up of rates at some point and a big crash since otherwise you get hyperinflation. Another possibility is just inability to launch, small recessions after recession as rates slowly go up. 

@scorpioncapital Sure, but inflation had been going on at a high clip from 1965 (1%) through to 1979 (15%) when Volcker took his measures shortly after assuming the position of Fed chair.  It's a little early to be calling for drastic measures as the length of the run was the inducement to act.  With better information in today's environment, we'll probably see action sooner, but still it seems early.

[scorpioncapital]

9 hours ago, omagh said:

@scorpioncapital Sure, but inflation had been going on at a high clip from 1965 (1%) through to 1979 (15%) when Volcker took his measures shortly after assuming the position of Fed chair.  It's a little early to be calling for drastic measures as the length of the run was the inducement to act.  With better information in today's environment, we'll probably see action sooner, but still it seems early.

 

I think compensation for loss of buying power affects those who have savings or investments. Those who do not are going to get killed by high inflation. Since I read that a large number of citizens cannot even pay a debt of a few hundred dollars and live paycheck to paycheck high inflation is indeed far worse regardless of how high interest rates go or how small or big the delta is. On the other hand, highly indebted citizens are a big social problem. It is possible that the populist tendency to keep interest rates suppressed to pay off the debt will be made at the expense of the daily living problems of high inflation. Perhaps the key is to look at the situation of the largest segments such as the middle class. Their financial situation will dictate policy I think.

 

 

[Libs]

On 6/27/2021 at 8:37 PM, longterminvestor said:

Mr. Buffett and Mr. Munger have always been quoted as saying "No company ever went out of business having too much cash", however they forgot to mention what to do in an inflationary environment.....Schiller P/E at these heights scares me for sure.  Where do you put money??  I just keep saying to myself, trust quality and invest in great businesses - things will be good over the long term.   

 

LASTLY - I stopped looking at the P/E ratio on BRK a long time ago.  The websites/algorithms crawling the data can not seem to get the Class A/Class B share distribution correct so the algo takes financial data reported and divides by share count of the A or B and mis-reports a P/E ratio and any other per share ratio.   I stopped worrying about P/E ratio on BRK so I don't even know of a website/source that does the math correctly.  wish I could recommend one to you.  

Agreed. Even Barron's repeatedly ignores the undistributed earnings of the stocks, which are significant. For years when BRK was 15X Barrons was reporting 25X. Ridiculous. I am a fan of the look-through method noted elsewhere here.

[omagh]

http://csinvesting.org/wp-content/uploads/2015/01/Buffett-inflation-file.pdf

Warren Buffett’s Comments on Inflation This is a compilation of Warren Buffett’s comments on inflation and some of the types of businesses he thinks do well in inflationary times. These comments were compiled from his 1977 Fortune article “How Inflation Swindles the Equity Investor”, his annual letters, and also include other commentary that is not inflation specific, but that I thought was useful to review in this context.

[omagh]

https://klementoninvesting.substack.com/p/how-to-survive-a-black-swan-event

From a corporate perspective, there are basically three ways to cope with such extreme shocks and survive both the immediate impact as well as the following years. A company can have enough cash and liquidity reserves, it can have a high equity capital ratio and increase borrowing, or it can change its operations and become more flexible and leaner.

 

And when it comes to these three levers, the historical evidence seems pretty clear cut. The only thing that helps a company survive these extreme revenue shocks is access to cash. Companies that either had lots of liquidity at hand or could tap into existing credit lines to increase their cash at hand were more likely to survive and recovered more quickly. 

[bizaro86]

On 7/21/2021 at 10:08 AM, scorpioncapital said:

You know if inflation was 10% and interest rates say 7% it would not be much different than today at say 3% inflation and 0% rate. Perhaps it is the difference between the repression of rates and inflation, the real rate of interest that matters. How wide was this gap in the 70s before Volker jacked up rates? Was it like 3% and 15%? It might matter as a comparison. It is this delta to watch perhaps. If it gets way out of hand you know there will be a jack up of rates at some point and a big crash since otherwise you get hyperinflation. Another possibility is just inability to launch, small recessions after recession as rates slowly go up. 

 

I think 7/10 would be worse because you'd have to pay income tax on the 7 and then lose 10 in purchasing power.

 

At least 0% nominal is tax free before you lose your 3% in purchasing power.