Warren Buffett is considered one of the greatest investors of all time, and his track record supports that.
Since taking control of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) in 1965, he's managed to increase the value of the business by 4,974,948%. That's a practically incomprehensible number, so I'll put it a different way: If you invested in Berkshire Hathaway when Buffett took over, you'd have more than 138 times the wealth you'd have if you'd just bought and held the S&P 500.
Buffett took Berkshire Hathaway from a struggling textile business and turned it into a conglomerate with a huge insurance business and equity portfolio at its center. Investors watch Berkshire's equity portfolio changes closely to try to glean ideas from the Oracle of Omaha. But Buffett's been selling a lot more stocks than he's been buying lately.
There's one investment Buffett's been piling money into during the past year, though. Berkshire's position in short-term U.S. Treasury bonds increased by more than $58 billion over the past year as Buffett funds new purchases with stock sales and cash flows from Berkshire's core business. And he said he expects to add another $11 billion in the second quarter.
Image source: The Motley Fool.
The only short-term investment Buffett likes
Buffett is well-known as a long-term investor. He's famously quoted as saying "our favorite holding period is forever" when it comes to his best investment ideas for Berkshire. But not every investment should be held forever.
Indeed, Buffett views short-term Treasuries as the best place to hold excess cash while he looks for good long-term investment opportunities. Practically all of Berkshire's cash gets invested in Treasury bonds that mature within one year, most within six months.
Buffett explains why he insists on keeping funds in short-term government bonds in every quarterly report. "We continue to believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments," he wrote in Berkshire's first-quarter earnings release.
For now, he's getting both safety and yield. Treasuries maturing within six months yield about 5.3%, as of this writing, more than a percentage point higher than the 10-year Treasury note. That's not typically the case. The inverted yield curve is the result of expectations that the Federal Reserve will lower rates over the next few years.
Buffett hasn't always been a staunch advocate of short-term government bonds. It's a lesson learned from experience. He bought long-dated government bonds in the 1970s and later felt the impact of inflation on the investment. "It was a mistake to buy fifteen-year bonds, and yet we did," he wrote in his 1979 letter to shareholders. "We made an even more serious mistake in not selling them (at losses, if necessary) when our present views began to crystallize."
He would much rather take a lower yield and let the bond reach maturity, then reinvest the proceeds at market rates, than gamble on where interest rates will be during the next 15 years. The fact that short-term bonds currently yield more than 5% is just icing on the cake. At Berkshire's 2024 annual shareholder meeting, Buffett said he'd still be sitting on short-term Treasuries even if yields were 1%.
Buffett's going to keep buying
During his opening remarks at the Berkshire Hathaway shareholder meeting in May, Buffett predicted the company's cash and Treasury holdings will surpass $200 billion by the end of the second quarter. That's an $11 billion increase from the end of last quarter.
"We'd love to spend it, but we won't spend it unless we think we're doing something that has very little risk and can make us a lot of money," he said.
That's tough to find, especially because "a lot of money" is now very different for Berkshire than it used to be -- its market value has ballooned to nearly $900 billion. "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire," Buffett wrote in his most recent letter to shareholders. And he's not going to buy one unless it's attractively priced and has a margin of safety.
Buffett's managed to add small amounts of some major businesses over the past year. He most recently took a large stake in Chubb, the insurance company. He continues to add to his stake in Occidental Petroleum. And Berkshire's also buying up large amounts of Liberty SiriusXM ahead of its merger with Sirius XM later this year.
But those purchases are relatively small compared to the amount of free cash flow that the core Berkshire Hathaway operations are generating every quarter. And with Buffett selling some stocks to take profits and take advantage of currently favorable tax rates, the cash keeps piling up.
Berkshire is now more prepared than ever to strike when an opportunity presents itself. It could have the opportunity to buy all or some of a great company if the country faces an economic downturn, or more acute forces push specific sectors lower. In the meantime, an additional 5% return on $200 billion is a nice way to add $10 billion per year to Berkshire's pretax income.
You don't have to follow Buffett into Treasuries when you can simply buy Berkshire stock instead.
With shares trading at 18.7 times forward earnings, Berkshire Hathaway stock looks attractive. That's especially true when you take into account its huge cash position, Buffett's penchant for share repurchases, and his opinion that the present set of businesses under Berkshire have "better prospects than exist at most large American companies."
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
