Cash the New Gold. Buffett's Bold Strategy
Over the past year, Mr Warren Buffett has increased $Berkshire Hathaway(BRK.B)$ cash, cash equivalents, and short-term investments in US treasury bills by $58 billion.
When enquired why he sold $Apple(AAPL)$ shares, Mr Buffett seemed to slip up in his response, revealing his true thoughts on the US stock market.
This is why reporter Jordan Sauer is bullish about iShares Short Treasury Bond ETF (SHV), that mirrors Buffett’s investment in short-term treasuries. (see below)
At the recent Berkshire AGM, CNBC‘s Becky Quick had asked Mr Buffett why he’s been trimming his stake in Apple.
Mr Buffett started by affirming that Apple is an even better business than $Coca-Cola(KO)$ and $American Express(AXP)$.
And it will remain Berkshire’s largest investment at the end of 2024.
Stake in Apple Inc.
Based on estimation, Berkshire Hathaway has approximately 905 million shares in Apple Inc.
It would take a long time to sell it off.
When Mr Buffett stared offloading them in Q4 2023, and then in Q1 2024, it is difficult to decipher if that is the set in-motion intention?
Apple made up 50.19% of Berkshire’s equity portfolio (by end 2023) with an estimated value of $174.3 billion.
After the recent sell off, based on its latest 10-Q filing, Berkshire’s stake in Apple is valued at just $135.4 billion,
His explanation / justification on the sell off is telling:
“I don’t mind at all, under current conditions, building the cash position.
I think when I look at the alternative of what’s available in the equity markets, and I look at the composition of what’s going on in the world, we find it (cash) quite attractive.”
Berkshire Hathaway’s cash, cash equivalents, and short-term investments in US treasury bills has increased from $131 billion in Q1 2023 to $189 billion in Q1 2024.
This is a staggering +44.27% increase or $58 billion increase over just one year.
Is Cash Attractive?
Why isn't Warren Buffett afraid to hold onto a lot of cash?
Why does he find cash attractive compared to stocks?
This is because of what the Federal Reserve is doing right now.
(1) Attractive Yield.
A one-month Treasury note currently yields 5.36%.
A one-year Treasury note currently yields 5.14%.
This is an attractive payment for a US government bond and yields have not been this high since 2007.
(2) Expensive Stock.
US stock market is expensive right now, with all the “record breaking highs” achieved daily.
The S&P 500’s (SPX) P/E ratio is sitting at 27.6x.
Another way to look at it is - an investor gets a 3.6% earnings yield if he/she invests in the S&P 500 Index.
Is this comparison obvious and clear enough? I think so !
In Mr Buffett’s recent annual letter to shareholders, he seemed to indicate the market has gotten speculative in recent years, and he may be anticipating better opportunities in the future.
Why Buffett Is Increasing His Cash Position
Mr Buffett believes Berkshire Hathaway's strong cash position allows them to take advantage of big opportunities when the stock market falls sharply.
He also thinks the stock market is more like a gambling casino today than it was in the past.
According to him, people are constantly tempted to invest like they're gambling.
Apple’s Challenges.
With a P/E ratio of 29.5x, Apple's stock price is considered high.
At the same time, the stock offers a relatively low earning yield of 3.4%.
This means investors are paying a lot for each Apple share.
With the lingering and escalating tension between US and China, the risks associated with Apple's business has heightened.
Even though Apple is very successful now and makes a lot of profit, it is unclear if they can stay ahead of the competition curve in the future.
Likelihood of Higher Taxes.
Towards the end of Buffett’s response to CNBC’s Becky Quick’s question, he also said, “With the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely.”
If this prediction comes true, higher corporate taxes could further squeeze the S&P 500’s and Apple’s net margin.
Buffett also said he does not mind paying capital gains tax (now) because, capital gains rates could always be higher in the future.
Why Short-Duration Treasuries?
So, why didn’t Mr Buffett invest in long-term bonds?
Writer Jordan Sauer believed it is because in the event of a market crash, short term bonds will roll over quickly to provide (a) liquidity and (b) safety of principal.
Another way to look at it is, if treasury yields were to increase to 10%, Mr Buffett’s short-duration notes would roll over quickly, and he could simply reinvest at higher rates, achieving compound interest.
Versus If he owned long-duration bonds, they would likely decline in value as interest rates increase.
Cloning Mr Buffett’s Investment Strategy.
The author (Jordan Sauer) selectively clones Mr Buffett's investment strategy.
He bought Berkshire Hathaway stock when Buffett did (stock buybacks) in 2020, and again in 2022 for Citigroup (C) when it seemed undervalued.
He also invested in energy companies in 2022-2023, similar to Buffett's oil stock (Occidental Petroleum) purchases.
Currently, 25% of his portfolio is in $iShares Short Treasury Bond ETF(SHV)$.
This ETF invests in very short-term US government bonds (less than 1 year) with an average return of 5.33%.
It holds a variety of these bonds and pays a monthly dividend. (see below)
Dividend's details
Dividend amount per ETF share
Most important, this ETF’s price does not fluctuate much. (see below)
Over the past 10 years, the ETF has traded at a low of $109.76 and a high of $111.05.
To him, holding SHV is the easiest way to clone Buffett’s huge position in short-term treasuries.
Does that means Mr Sauer is a doomsayer? Not at all.
His cash portfolio offsets his more aggressive bets.
By holding SHV shares, he has the flexibility to have the cash available to buy low should there be volatility or a recession.
My viewpoints: (mine & mine only)
I am so glad that I have come across this post especially how writer emulates Mr Buffett’s investment strategy.
With too much information on the internet, one could lose clarity of sight in what to invest when the strategy is right in front of you (emulate Mr Buffett, after due diligence to see if the shoe fits).
This post also reinforces the strategy of “do not put all eggs in one basket”, why it is so important to put it into practice.
When it comes to investing, it is pays to learn from others and build your own!
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Haha, he has his own strategy. People always understand what he is doing after a long time.
Pls help to "Re-post". Tks! Rating is important (to me).
Would you consider "Follow me" and get first hand read of my Daily new posts? Thanks!). Tks!
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