Warren Buffett carries many a title around with him - The Wizard of Omaha, the Oracle and the Sage of Omaha, to name just a few - and one wonders if this is great PR or adulatory terms laid at his door by his peers. As he is one of the richest men on the planet, we have to incline towards the latter, and it is therefore not surprising that he has the ear of Presidents, world leaders and blue-chip CEO’s from every corner of the globe.
However, he has been on a selling spree lately. Platinum considers what Buffett knows that everyone else doesn’t, and whether the markets should be concerned at this.
Buffett is a business magnate, philanthropist and the most successful (serial) investor of the 20th century. He is the Chairman and majority shareholder of Berkshire Hathaway and is currently ranked as the third wealthiest person in the world. Yet, despite his vast wealth, he lives a remarkably frugal life and has vowed to give away 99% of his wealth to philanthropic causes before he shuffles off this mortal coil. He has joined with Bill Gates and many others to donate their cash to the Gates Foundation in his will, and one can only imagine what his children think of this, despite the remaining 1% being more than most of us mere mortals will ever see in a lifetime.
Born in 1930 to US Congressman Howard Buffett, it was remarked at a very young age that Warren seemed adept and unusually interested in money. His 1947 yearbook entry noted that he “likes math; a future stockbroker”.
Like so many self-made men of his generation, he demonstrated remarkable savvy at a young age. At school, he sold chewing gum at a 15% markup; he went door to door selling magazines, purchased a £25 pinball machine which he then rented to a diner, and within a few months he had eight of them at various locations around the town paying him rent. He also showed a great deal of honesty and adherence to the rules: on his first income tax return in 1944, for instance, he took a $35 reduction for the use of his bicycle on his paper round.
There are two key reasons why Buffett is so admired. Firstly, he is just so damn good at what he does. He almost always chooses the right companies and he knows what they need to achieve their full potential.
Secondly, he goes about his business in an ethical way and uses his wealth to forward good causes.
How did Buffett accumulate such wealth?
Firstly he started early. Unlike many tycoons, he didn’t inherit huge sums, his wealth accumulation came from his own efforts, and he started as a child, buying his first shares at the age of 11. He had three shares in ‘Citi Service preferred stock’ which he bought for $38.25 each.
He sold them in 1944 at $40, making about $5 profit. But after selling the price climbed rapidly to reach $200 a share. It was a big lesson for the young Buffett. Within four years he had a portfolio worth about $6,000.
Buffett had learnt to be patient and he started to hold onto stocks. He has said, “Long term, the stock market is going to be higher, and I’ve written that many times. In terms of what it’s going to do next year or tomorrow, I have no idea.”
This long-term approach became his trademark. He has been more than content to earn modest but consistent returns, which compounded into huge returns in the long run. His methods are hardly rocket science (and he is one of the few super billionaires who doesn’t have a space exploration obsession).
His investment style focuses on fairly straightforward metrics. In short he buys stocks he thinks are fairly priced and that have a competitive advantage over their peers, and then he keeps them.
The Warren Buffett success story really starts in 1956, when he was just 25 years old. He had graduated from Columbia Business School with a Masters in Science and Economics and embarked on a short career as an investment salesman and then securities analyst, but at 25 he decided to make his move.
By 1962 the Buffett Partnership had a value of over $7 million (of which over $1 million belonged to Buffett). He continued to crush the stock market. In 1968 the Buffett Partnership returned 58.8% compared to 7.7% for the Dow – Buffett’s best year ever.
Buffett closed the partnership in 1969, largely because he feared that he could not maintain such an incredible run of success. With the changing nature of the markets, any success would, he believed, be more down to luck than good judgement and he didn’t want to risk other people’s money.
Of course, he hadn’t lost the Midas Touch but it is typical of the way in which he always acts with a sense of integrity.
During the successful years of the Buffett Partnership, Buffett made what he describes as his worst investment by taking the majority shareholding in a traditional textile company called Berkshire Hathaway.
Wikipedia reports that in 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company’s financial situation was not going to improve. In 1964, the owner Seabury Stanton made an oral tender offer of $11½ per share for the company to buy back Buffett’s shares.
Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $113⁄8. Buffett later admitted that this lower, undercutting offer made him angry. Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this put Buffett in a situation where he was now majority owner of a textile business that was failing.
It was a rare occurrence of Buffett making a decision through a negative emotion. Buffett kept the name but moved the focus of the business into insurance and it became the holding company for Buffett’s investments. And there were plenty of those.
To list the assets of Berkshire Hathaway would take up all the space allocated to this profile. Berkshire owns outright dozens of American companies which most UK readers will have never even heard of, but are all sizeable concerns on their own. For example it owns Benjamin Moore & Co. (worth an estimated $1bn), ACME Brick Company ($600m) Dairy Queen ($585m), CORT Business Services ($467m), and the list goes on.
Berkshire also has sizeable stakes in American Express, American Airlines, Goldman Sachs, IBM, Apple, Coca-Cola, Kraft Heinz, Mastercard, Visa and Wal-Mart, to name but a few.
Integrity and Ethics
One of Warren Buffett’s much-used phrases is: “If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”
What other people think seems to matter to Warren Buffett, and he has always placed great emphasis on doing business with integrity. In many ways he has always been light-years ahead of the game. In recent years there has been a lot written about the benefits of mindfulness. Buffett has been practicing this for years, even if he never applied this particular label.
He has said, “There’s one investment that supersedes all others: invest in yourself. Stay healthy on all three planes, mind, body and spirit: eat good food, drink plenty of water, read, and never stop learning.”
He adds that, “I insist on a lot of time being spent, almost every day, to just sit and think.” Hardly the high-powered, 100-mile-an-hour culture of Wall Street. You could never imagine Buffett declaring that lunch is for wimps.
If he is ahead of the game on mindfulness, he is even further ahead on female equality in business. In the 1950s at the University of Nebraska, he set up a course entitled Women and Investing, aimed to get women involved in stocks and shares.
The inequality of opportunity has always outraged him and he is quite clear about how much of an advantage he had by being born male: “One of the reasons for my success was that I was only competing with half of the population. Life is a lottery. I had a 50% chance of being born female with the same IQ and talent, which would have made career options as limited as my sisters. Women have the same potential as men; it is our duty to help them to release it.”
And then, of course, there is the legendary philanthropy. Another quote from Buffett explains his thinking: “If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”
CNBC reported that Buffett topped the list for billionaires who gave the most since 2000, an estimated 71% of his fortune.
Not content to give away huge sums of his own money, he has applied pressure to his fellow tycoons to do the same. Created in partnership with Bill and Melinda Gates, the Giving Pledge came to life in 2010 following a series of conversations with philanthropists around the world about how they could collectively set a new standard of generosity among the ultra-wealthy.
The mission statement is: “The Giving Pledge is an effort to help address society’s most pressing problems by inviting the world’s wealthiest individuals and families to commit to giving more than half of their wealth to philanthropy or charitable causes either during their lifetime or in their will.”
Starting with 40 American philanthropists, there are now 183 philanthropists from 22 countries who have signed the pledge.
With a track record of philanthropy, integrity and an unbeatable ability to spot a good deal, it’s no wonder that businesspeople pledge millions for lunch with Mr Buffet.
Recent net selling
A dozen rounds of selling have trimmed Warren Buffett’s stake in Bank of America Corp. to the cusp of a key regulatory threshold, in which he will no longer need to quickly notify the public of his trading.
His Berkshire Hathaway Inc. now owns about 10.3% of the bank after the latest round of his 10-week selling spree, a regulatory filing shows. If he maintains course, his stake would drop below 10% very quickly, freeing him from the duty to swiftly disclose trades. Once Berskshire holds less than that, it can provide quarterly updates instead.
Most recently, Buffett liquidated $461 million of stock over the three days, according to the filing. That brought total sales since mid-July to $9.4 billion.
Even then, Berkshire’s remaining stake in the lender is worth almost $32 billion, based on recent closing prices, preserving the conglomerate’s perch as the top shareholder.
Momentum in the U.S. stock market appears relentless. After a remarkable 24% surge in the S&P 500 in 2023, the index has climbed another 20% in 2024, despite some temporary setbacks earlier in the year.
Amid this bullish backdrop, Jim Grant, editor of “Grant’s Interest Rate Observer,” issued a pointed caution for investors.
“We shouldn't forget that it is at an all-time high, almost everything, price to earnings, price to book, price to sales, what have you, and nor should we forget that the greatest equity investor is about ready to show a balance sheet that's 50-50, with more T-bills than stocks,” he said in an interview with Fox Business.
Grant was alluding to investing legend Warren Buffett, implying that Buffett’s pivot toward safer assets like Treasury bills — short-term debt securities issued by the U.S. Treasury with maturities of one year or less — may be a red flag for investors.
“When the greatest equity investor owns more bills than equities, one at least is advised to step back and say, if this is perfection, how does it improve?” Grant warned, suggesting that investors consider the potential risks of an overheated market.
Buffett’s cash reserve
Buffett’s company Berkshire Hathaway has reduced its stakes in several major holdings this year. For instance, in Q2, Berkshire sold 389 million shares of its top holding Apple, cutting its position by 49.3%. It also reduced its stake in Capital One by 21.3%, offloading 2.65 million shares. Additionally, a more recent filing reveals that Berkshire trimmed its stake in Bank of America down to 10.5% in Q3.
While Berkshire did make some purchases in Q2, it sold far more than it bought, marking the seventh consecutive quarter as a net seller of stocks.
As a result, the company is sitting on a substantial cash reserve. As of June 30th, 2024, Berkshire’s cash, cash equivalents and short-term investments in U.S. Treasury bills totaled $271.5 billion.
What’s particularly noteworthy is the vast amount Berkshire has allocated to Treasury bills. By the end of June, Berkshire held a whopping $234.618 billion in Treasury bills. That’s more than the U.S. Federal Reserve's Treasury bill holdings, which stood at $195.293 billion as of September 25th.
Still, Buffett held a larger position in stocks. As of the end of June, Berkshire’s investments in equity securities totaled $284.871 billion, reflecting its continued substantial exposure to the stock market.
Why is Buffett holding so much cash?
Berkshire's massive cash position has sparked questions about why Buffett isn’t seizing more investment opportunities. After all, as Grant noted, Buffett is often hailed as the world’s greatest investor. From 1964 to 2023, Berkshire achieved an extraordinary overall gain of 4,384,748%, far outpacing the S&P 500’s return of 31,223% over the same period.
Buffett has addressed the cash concern, explaining his cautious approach during Berkshire’s annual shareholders meeting earlier this year.
“I don't think anybody sitting at this table has any idea of how to use it effectively, and therefore we don't use it,” he stated, emphasising that “we only swing at pitches we like.”
Buffett has also voiced concerns about future complexities, noting, “As the world gets more sophisticated, complicated and intertwined, more can go wrong.” He added that the company aims to be prepared to “act when that happens.”
While some see Berkshire’s cash hoard as a defensive stance against a potential market downturn, others interpret it differently. Fund manager Chris Bloomstran told Business Insider that the situation is more nuanced.
He noted that Berkshire’s large insurance operations necessitate a substantial cash reserve to cover potential payouts. Moreover, given Berkshire’s size, its range of suitable investments is limited. Bloomstran pointed out that with Treasury bills offering decent yields, Buffett can afford to be patient.
“He's limited to maybe the 100 biggest companies in the S&P 500 and maybe a handful of international businesses to be able to invest in,” Bloomstran explained. “So, his opportunity set is expensive, but he doesn't mind earning 5.3% in the interim, but it does not mean in any way, shape, or form that a stock market crash is imminent. He's just trying to find great prices stable enough to put money to work. His universe is limited.”
Of course, financial prudence has always been a cornerstone of Buffett’s philosophy. In his recent letter to shareholders, Buffett emphasized that Berkshire “holds a cash and U.S. Treasury bill position far in excess of what conventional wisdom deems necessary.”
This conservative approach could prove to be a significant advantage during times of financial turmoil. Buffett highlighted that during the 2008 financial crisis, Berkshire generated cash through its operations, without relying on commercial paper, bank lines or debt markets in any capacity.
“We did not predict the time of an economic paralysis, but we were always prepared for one,” Buffett said, underscoring the importance of maintaining liquidity in uncertain times.
