In an October 16, 2008 op-ed entitled ‘Buy American. I Am’, Warren Buffett revealed that he was moving his own wealth into equities, adding that “If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.” Coming from someone that regularly contends he never tries to time the markets, this was easily Buffett’s most bullish call since October 1974. And while it would take and additional 5-months before stocks would reach a ‘bottom’, it is now safe to conclude that Buffett, once again, was right.
To recap: Back when many believed all was lost Buffett had the courage to invest in America based largely upon one elegantly simple premise:
“…the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts…Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”
28-months after Buffett penned the above: America is still here, stock prices have bolted significantly higher, and it is now accepted wisdom that policy makers have successfully ‘forced’ investors into riskier assets by reducing the returns on safe assets. Accordingly, the legend of Buffett continues to grow…
Needless to say, the conditions that made Buffett bullish back in late 2008 are no longer prevalent today. Rather, ‘fear’ in the marketplace has vanished, stock prices have outpaced any fundamental improvement in the economy, and the story of cash being a dead asset has been beaten to death. Ever the contrarian, Buffett’s historic romp into equities is, at least for the moment, over.
Buffett Begins Hibernation Process
In the fourth quarter of 2010 Buffett continued to reduce his (Berkshire’s) equity positions, cashing out approximately $1.2 billion (Berkshire 13F filings). Buffett also failed to produce any new buys and only added to a single long-term holding (Wells Fargo). When contrasted against yesterday’s penchant for deal making these activities, or lack thereof, strongly suggest that Buffett is becoming bearish on equities.
It has been argued that many of Berkshire’s recent stock sales are related to the retirement of GEICO CEO Louis Simpson (the same story used to explain Berkshire’s stock sales in the third quarter of 2010). However, GIECO-related portfolio reshuffling does not fully explain why Berkshire’s cash hoard continues to skyrocket. To be sure, Berkshire’s upcoming 10K will likely reveal that Buffett has added more than $10 billion in cash since the second quarter of 2009 (up approximately +50%) - a figure well above the increase in tangible equity created by Berkshire during the same time. Furthermore, given recent trends Berkshire will likely soon eclipse the record $67 billion in cash and ‘fixed maturity securities’ Berkshire hit in 2005.
Assuming stock prices do not capitulate lower, this 5-quarter theme of cash accumulation could remain in play for some time. After all, remember that the last time reckless monetary and fiscal stimulus efforts united to produce a recovery Buffett spent nearly 5-years amassing cash.
In short, the problem of having more cash than ideas is not one that Mr. Buffett has had to deal with since he went on a buying binge in 2008. And while it is not known to what degree Buffett has reduced his personal exposure to equities, that Berkshire cannot find any equity bargains and is starting to hoard cash in a relatively big way is self explanatory: sell.