Analysts have struggled understand Warren Buffett-led Berkshire's $128 billion reserve. After the stock market beating, it's making sense.
Analysts have struggled to understand the rationale behind Warren Buffett-led Berkshire Hathaway’s $128 billion cash reserve. Now, after the U.S. stock market’s 2-day beating, it’s starting to make sense.
Staying true to his investment philosophy, Buffett has been exceptionally frugal in the latest bull market. As the U.S. stock market hit record highs, the billionaire investor did not complete a major acquisition.
The strategy of Berkshire Hathaway led analysts to wonder what Buffett is seeing that the market isn’t, especially given that the U.S. economy is set to expand in the fourth quarter of 2019.
The bullish case for the U.S. stock market heading into 2020 centered on accommodating monetary policies and the likelihood of a trade deal between the U.S. and China.
After President Trump suggested that a deal may not be signed this year, the U.S. stock market began to sell-off. The equities market had clearly been pricing in the completion of a phase one deal by December.
What Buffett likely saw was an overvalued market based on the assumption that geopolitical and trade-war risks would dissolve in the short-term. However, a comprehensive deal by the year’s end was always going to be difficult as it relied on too many variables.
Keith Lerner, chief market strategist at SunTrust, explained that the vast majority of investors leaned towards a single direction in recent months, causing the stock market to become vulnerable.
“When everyone is leaning one way, eventually something can tip the scales the other way,” Lerner noted.
On Nov. 29, CNBC reported that Buffett was outbid by private investment firm Apollo Global in his efforts to purchase Tech Data.
Buffett valued the company at $5.14 billion with a slight premium over the firm’s market cap at the time at $4.5 billion.
Ultimately, Tech Data accepted the $6 billion offer from Apollo Global, as Berkshire walked away from what it could have been Buffett’s first major multi-billion dollar acquisition in four years.
Five days after, the U.S. stock market substantially declined, as the Dow Jones fell by 761 points in just two days.
In its 2018 annual shareholder letter, Buffett emphasized that the cost of buying businesses with decent long-term prospect is sky-high.
Even as early as February 2019, Buffett showed his lack of appetite for inflated deals despite improving sentiment around the stock market.
He wrote earlier this year:
“In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.”
So far, Buffett has accurately determined that stocks and highly sought-after businesses are likely overvalued.
This article was edited by Sam Bourgi.
Last modified: January 30, 2020 9:13 PM UTC