The Journal. - Does Warren Buffett Know Something We Don’t?

Episode Date: November 13, 2024

The famous investor and muti-billionaire CEO of Berkshire Hathaway is doing something unusual: selling stocks and hoarding cash. WSJ’s Spencer Jakab breaks down possible reasons why and what everyday investors can learn from his choices. Further Reading: - Does Warren Buffett Know Something That We Don’t?  - A $150 Billion Question: What Will Warren Buffett Do With All That Cash?  Further Listening: - Charlie Munger: Curmudgeon, Sage and Investing Legend  Learn more about your ad choices. Visit megaphone.fm/adchoices

Warren Buffett is probably the most famous investor alive. His company, Berkshire Hathaway, is worth more than a trillion dollars. And the way he's made all that money is by playing the long game. When he buys shares of a company, he tends to stay invested. He once said that his favorite holding period for a stock is forever. But recently, Buffett, who's 94 years old, has been getting attention for doing something that's totally out of character. He's selling stocks and hoarding giant piles of cash.

His cash level is extraordinary today. That's our colleague Spencer Jacob. He has built up cash and cash equivalents of $325 billion on the balance sheet of Berkshire Hathaway. Wow. Like, if you were to stack up all these $1 bills, $325 billion, $1 bills, like, does that get you like close to the moon? Like, does it?

Can you paper over the entire planet Earth with all this money? Yeah, I think it gets you if you... The end to end, I have not done the measurement. I think it gets you to the moon or the sun or something crazy like that. And I mean, you imagine Warren Buffett sitting in a bunch of money or gold or whatever, or Scrooge McDuck diving into the water. Right, diving off a dive board into a swimming pool of coins, which by the way, you would hurt yourself. It would hurt. You wouldn't dive in.

Yes, do not attempt. Just a disclaimer. It does not move like water. Do not attempt at home, kids. But $325 billion, it's a tremendous amount of money. It's enough to buy all but the 24 or 25 largest US listed companies. He could buy Boeing and AT&T and have cash left over. And so it has people scratching their heads. Scratching their heads. Because why is the guy who likes to invest forever holding

on to $325 billion in cash? And that has people very interested and a little bit holding on to $325 billion in cash. And that has people very interested and a little bit concerned about what he might think about the state of the market and the global economy. Welcome to The Journal, our show about money, business and power. I'm Ryan Knudson. It's Wednesday, November 13th. Coming up on the show, why is Warren Buffett hoarding all this cash? This episode is brought to you by TELUS Business. This Black Friday, TELUS Business is helping small businesses get more done and save. Get the latest technology for your business at exclusive Black Friday prices.

Shop these limited time offers today at telus.com slash business Black Friday. Conditions apply. TELUS, proud supporter of Canadian business. It's hockey season. at telus.com slash business Black Friday. Conditions apply. Telus, proud supporter of Canadian business. It's hockey season, and you can get anything you need delivered with Uber Eats. Well, almost, almost anything. So no, you can't get an ice rink on Uber Eats. But iced tea, ice cream, or just plain old ice?

Yes, we deliver those. Goal tenders, no. But chicken tenders, yes. Because those are groceries, and we deliver those too. Why do people care so much about Warren Buffett? Why is he such a big deal as an investor? Warren Buffett is a remarkable investor. Warren Buffett is not just lucky. He has such a long track record, the 70-year track record that we can document of his investing. And obviously not every year has been a resounding success, but compounded over those years, no

one has done it as well and no one has done it for as long as Warren Buffett has. Buffett started investing when he was a kid. He eventually bought a run-down textile manufacturing company called Berkshire Hathaway. And he used it to buy other companies and invest in the stock market. Over the decades, the key to Buffett's success has been to, one, pick the right companies to invest in, and then, two, hold on to those investments for a long time and let the magic of compound interest do the rest. Compound interest is basically making money and then making money on that money, and then making money on that money,

and making money on that money, and it can turn into a gigantic difference at the end. Since 1965, when Buffett took over Berkshire Hathaway, the S&P 500 has made 10% a year on average. Buffett, on the other hand, has made 20% a year on average. And thanks to the power of compound interest, that difference is way bigger than it sounds. If you had invested in Berkshire Hathaway when he took it over in 1965, today you would have made 140 times as much as an investor who just bought the Standard Imports 500.

Here's Buffett talking about compound interest in a documentary. It's a pretty simple concept, but over time, it accomplishes extraordinary things. The longer you hold onto a stock, the more time that compound interest can work, which is why it's so surprising that Buffett has been selling stock from big companies like Apple and Bank of America. It's been the last two or three quarters that Berkshire Hathaway has been selling down its positions. So Berkshire Hathaway was building up cash.

He has sold down two of his largest shareholdings, not to zero, but tens of billions of dollars of each of these holdings. Buffett hasn't said exactly why he's doing it. Is it possible that his decision to take this money out of the stock market has something to do with just where he is in his own life? I mean, he's 94 years old. Obviously nobody lives forever.

Could he be thinking about, you know, could that be a factor in what he's doing right now? You know, I got so many reader emails and comments saying, does this have to do with the state planning? Maybe it's the smartest state planning strategy and then he has more cash to leave to people. That's actually not the case at all, because he is going to leave more than 99% of his money to charity in the form of Berkshire stock. So whether Berkshire has a lot of cash or has no cash, does that matter?

Did you think that Warren Buffett's cash hoarding might have something to do with the presidential election and who he thought might win? Yeah, it's been suggested to me, you know, in reader comments and some smart reader comments, well, maybe he was hedging his bets because of the election, or maybe he was concerned about inflation, or maybe he sold all these stocks because he reckoned that capital gains taxes would rise, and so he wanted to lock in a lower rate.

And I'm going to say, based on my knowledge, I don't think that the economy or taxes or capital gains or anything like that, or even an election, or who sits in the White House, has any effect on him because it's also short-term. But even though Buffett isn't saying exactly why he's doing this, Spencer says his track record offers some clues.

Back in the 1960s, Buffett sold off a lot of stock when he thought the market was overvalued. In the 1990s, Buffett also became cautious just before the tech bubble burst, and he sold stocks again just before the 2008 financial crisis. Notice a pattern there? So if the only times he's pulled out of the market in the past is in the lead up to a recession or a market downturn, does that mean he thinks we might be headed for another one? Well, he hasn't said anything to that effect and there isn't a lot of evidence

that we're on the precipice of a recession, but there's widespread thinking among people who follow him that he just sees the market is too expensive. You know, something, the pendulum has swung really far one way, then it's got to swing back the other way. You just don't know exactly when. But even if there isn't a recession, some Wall Street analysts say the stock market is overpriced, which might mean growth could slow down significantly over the next few years. So Goldman Sachs recently came out and this got a lot of attention.

They said, we think that the stock market over the next decade, the S&P 500, which is the main stock index, is going to return 3% a year. By comparison, the S&P has averaged 13% over the past decade. People are like, what? Are you crazy? 3% a year? You know, what are you smoking? But that is consistent with some other measures out there. Vanguard, for example, sees growth stocks returning even less than that. So if his money isn't in the stock market,

what is Buffett doing with all that cash? That's next. This episode is brought to you by TELUS Business. This Black Friday, TELUS Business is helping small businesses get more done and save. Get the latest technology for your business at exclusive Black Friday prices. Shop these limited-time offers today at telus.com slash business Black Friday. Conditions apply. TELUS, proud supporter of Canadian business.

It's hockey season and you can get anything you need delivered with Uber Eats. supporter of Canadian business. Because those are groceries, and we deliver those too. Along with your favorite restaurant food, alcohol, and other everyday essentials. Order Uber Eats now. For alcohol, you must be legal drinking age. Please enjoy responsibly. Product availability varies by region. See app for details. ["Walking on the Moon"] Where does one even keep $325 billion?

I mean, you're obviously not stuffing it in a mattress, but like, spreading it out over different bank accounts? Like, where does he actually put all that money? Yeah, it is not at a bank, so you don't have to worry about a bank going bankrupt or being robbed or something where Warren Buffett keeps that cash. It is primarily in U.S. Treasury bills. If Warren Buffett tomorrow decides he needs cash,

he could sell $100 billion of treasury bills. It is as good as cash. And it's also safer, right? Because this is the US government. You're not likely to lose your money because the US government has a history of always paying its bills. That's right.

It is the safest and most liquid investment in the world. It's not the most profitable investment in the world. But at the moment, they're paying a decent interest rate. US Treasury bills are earning Buffett roughly four and a half percent interest, but it's a far cry from the 20 percent he's made annually on average during his career. I mean, four and a half percent or so on $325 billion, That's still a lot of money coming in. That is a lot of money, but on $325 billion, I mean, you're talking about $15, $16 billion a year, which for you or me is a lot of money.

I'd take $15 or $16 billion a year. I'd take it too. I think I'd settle for that. But Buffett doesn't seem think I'd settle for that. But Buffett doesn't seem to want to settle for that. He's spoken many times about why he likes to have a lot of cash. He likes to have dry powder for opportunities. But he's also on the record and pretty recently that he would like to do a big deal. You know, he's asked pretty much every year, especially since he's had this large amount

of cash, what are you going to do with this cash? What are your plans? And, I mean, he's just said, I'd sure love to do a deal, 50, 75, 100 billion dollar deal. He's called it, you know, an elephant. He'd like to go and bag an elephant. He'd like to go and bag an elephant. The perfect elephant is a big, healthy company that he can buy for a decent price. The problem is that right now, there doesn't seem to be a lot of good options.

He has not hesitated to sit on the sidelines and just sit on that cash. And so, you know, he's very disciplined that way. And so that should concern all of us, just as people who have 401ks, why is he not seeing good opportunities? What kind of returns does he foresee? What does it mean if Warren Buffett is looking out at the world of investing opportunities and says, nothing out here looks good to me?

He now manages so much money that he has to make very large investments and he only can buy very large companies And I think the the question Really is like Ken Warren Buffett do 20% a year in the future and he probably can and there's two reasons for that one Is that markets are not really well priced to deliver outstanding returns today over the next decade because markets are very expensive. And so the more expensive things are, the less perspective return that you have. But the other thing is that he just can't double

the market's return anymore because he has a trillion dollar company. So are you sort of saying that Warren Buffett has gotten too big for his buy and hold forever strategy to work anymore? Yeah, it's a high class problem that you have a lot of money and you can't double it. You can't buy a $100 billion company

and then have it be worth a trillion dollars in a few years because that just doesn't happen, right? So you'd have to be so not just smart, but lucky for that to happen. And so he is reaching the limits of his ability to outperform the market. He already has reached it. So what's the takeaway, do you think,

for everyday investors like the rest of us? I think the takeaway for everyday investors is not to sell everything and put it in cash because that's almost always a mistake. Trying to time the market usually has poor results. You are not Warren Buffett. I think the takeaway for everyday investors is if he's cautious about the general level of stocks, maybe you should temper your expectations as well. You know, you do need to invest your money in something, so maybe I want to, you know, put some

more of my eggs in a different basket as opposed to the same stocks that everyone owns. I think that's a very practical takeaway. I think selling everything and sitting in cash is not a practical takeaway because it's never been a long-term winning strategy Warren Buffett's reasons for doing that should not be your reasons for doing that That's all for today Wednesday November 13th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts.

We're out every weekday afternoon. Thanks for listening. See you tomorrow.