Investment legend Warren Buffett never tries to time the stock market, and nor should you. However, when he starts loading up on shares from his own company, it’s time to check what’s happening.
Buy-backs
The Sage of Omaha has been spending a chunk of his Berkshire Hathaway investment vehicle’s cash pile buying some of its shares for the first time in six years and, like everything else he does, people have opinions about it. Russ Mould, investment director at AJ Bell, said this implies that Buffett “is struggling to find a company that he wants to acquire at a price he wants to pay.” He’s not the only one to take this view, as my colleague Paul Summers says if Buffett is hoarding his cash, we should all consider doing the same.Â
The buy-back is actually Berkshire’s first major new investment in nearly three years, giving weigh to that view. However, equities actually represent 29.7% of Berkshire Hathaway’s assets, not far away from the vehicle’s high watermark of 32% in 1999. He may not see many buying opportunities, but he isn’t rushing to sell either.
A closer look at his portfolio suggests that his real concern lies elsewhere.
Discounted buy
Buffett and long-term business partner Charlie Munger like to buy shares when they are trading at a discount, and this applies to Berkshire Hathaway, too. That may be one reason why they decided to splash so much cash on their own shares, under a revised policy that frees him to decide when repurchases make sense.
This suggests to me that he thinks his favourite companies are trading on big enough discounts to make them worth buying right now, notably Berkshire portfolio stalwarts such as Wells Fargo, Apple, Bank of America, American Express and Coca-Cola.
Incidentally, some of these companies, notably Apple, are also buying back their own stock, giving Buffett a double kicker.
Cash is king
Let’s not get too carried away by these buy-backs. Berkshire spent $928m, which is only around 1% of Berkshire’s cash pile that has remained above $100bn for five successive quarters. Cash now represents 14.1% of Berkshire’s assets, down from 16% at the end of 2017, and way below the 24.5% of 2005. Buffett isn’t the only one who’s big on cash right now.Â
So he is clearly keeping his powder dry and waiting for opportunities. At the same time, he’s cut exposure to US Government bonds to just 2.5% of Berkshire’s portfolio, continuing the downward trend dating back to 2003. Yields may have climbed to around 3.2%, but there are risks, namely that rising inflation will diminish the attraction of fixed interest investments. Also, as bond yields rise, prices fall, potentially inflicting hefty capital losses on investors.
Cut price shares
This certainly looks a tempting time to buy global equities, with the FTSE All-Share down 7.1% this year, MSCI Europe down 7.4%, Japan down 9.4%, and emerging markets down 12.3%, according to data from Thomson Reuters. Only the US is up, by just 1.4%.
Shares are down after October’s volatility and, with a Santa rally in the offing, now could be a good time to pick up some pre-Christmas bargains.