Warren Buffett’s Berkshire Hathaway has been a net seller of stocks for the past nine quarters. The company’s cash stockpile has grown to more than $344 billion, its highest level ever. This has led to speculation about why Buffett and his team are holding onto so much cash.
Buffett has described what he looks for in an investment. In this year’s annual shareholder’s letter, he said, “We own a small percentage of a dozen or so very large and highly profitable businesses with household names such as American Express. Many of these companies earn very high returns on the net tangible equity required for their operations.”
When Buffett finds a “really outstanding business,” he loves to buy the whole thing.
Berkshire Hathaway now owns 189 subsidiary companies, many of which are recognizable, like battery maker Duracell and paint company Benjamin Moore. It’s also one of the largest furniture companies in the U.S., owning several retail chains in that niche. Many outstanding companies aren’t willing to be wholly acquired.
Berkshire Hathaway’s investment approach
But Berkshire Hathaway can always choose to buy a stake in a public company for its equity portfolio. Stocks are available to buy at any time, and, as Buffett emphasizes, “very occasionally, they sell at bargain prices.”
Buffett is known for his value approach to investing, which means that he looks for stocks that aren’t trading at their full potential, but that eventually will.
However, he has famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” His actions as an investor back that up. Although Berkshire Hathaway has sold more stock than it has bought during the past two years, it continues to deploy capital where it sees opportunities. However, Buffett mentioned, “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.”
One of Buffett’s most famous maxims is, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” When valuations are high and there’s a strong bull market, that’s the least likely time that Buffett is going to buy stocks.
When there’s enough fear to send the market down, that’s when he will be most tempted to buy. But investors should keep in mind that what’s more important than finding bargains is finding great stocks at fair prices and putting your money to work. The earlier you start, the more you stand to gain.
It’s a mindset. If you believe in the future of the U.S. economy, you can invest at any time and hold for the long haul.
Image Credits: Photo by Dan Dennis on Unsplash
