Warren Buffett Isn’t Buying, And Investors Could Care Less
As Berkshire Hathaway’s highly proclaimed annual report concluded this weekend amid much pageantry and splendor, the real takeaway in the room was Warren Buffett’s inability to spend $116 billion of the conglomerates warchest. According to Warren Buffett Himself, “Prices for decent, but far from spectacular businesses hit an all-time high [in 2017].” Giving the Chairman of Berkshire Hathaway much pause as market valuations continue to rise.
As the economy continues to boom under President Trump’s recent tax cuts, so too have the value of America’s Fortune 500, putting many businesses out of favor for the storied investor. Berkshire Hathaway has a track record of only purchasing businesses once they have become distressed (e.g., Flying J Truck Stops), and a booming economy presents little merger and acquisition opportunity for the financial behemoth moving forward.
Warren Buffet Isn’t Buying, So Why Should I?
The reality is, the majority of investors are not worried about rising market valuations as a rising market makes for a growing portfolio; so what exactly is the concern? Berkshire Hathaway is in the market to expand its empire through merger and acquisition, while investors such as you and I are in the market to grow our estate and eventually retire. This puts most investors at odds with Berkshire Hathaway’s agenda, as most long-term investors are looking for a return on their capital by way of long-term capital appreciation and consistent dividend income/reinvestment. Berkshire Hathaway on the other hand seeks to maximize return on their capital by way of strategic purchasing of struggling companies, (e.g., the purchasing of BofA warrants in 2011).
Soveriegnman has made the argument that investors are essentially paying record prices for shares of businesses that aren’t even all that great, but then fail to elaborate as to why. Clearly prices are elevated, however, as you will read on and discover for yourself valuations are not overpriced and the markets should continue to rise; so don’t sell based off of this kind of false analysis. For investors who already own stock in America’s Fortune 500, you would be hard-pressed to find anyone of them complaining about too much capital appreciation. What about investors already in retirement? Increased dividends this year from Cisco, Abbvie, Coca-Cola, Sherwin-Williams, and not to mention other Warren Buffett companies sure haven’t reduced retirees quality of life.
Those who take their cues from Warren Buffett as to when they should purchase stock are indeed not only incorrect to suggest that investors should be pulling back from the market, but more importantly, they are missing the larger picture. The larger picture as it relates to Berkshire Hathaway is that the conglomerate is trapped in the midst of a growing bull market, as a revitalized economy that has reached full employment for the first time in eight years presents little opportunity to acquire struggling businesses at a distressed price. The same economy that rewards investors for long-term capital investments, also punishes a those in the business of merger and acquisition by making it harder to find an attractive deal.
Is Owning Berkshire Hathaway the Solution To All My Problems?
Berkshire Hathaway’s reported net income increased a total of 65.3 billion compared to 2016, with per share market value rising 21.9% in 2017; nearly in line with the S&P’s return of 21.8% throughout the same time period. As such, investors tracking the S&P 500 via mutual or exchange traded funds (ETF) would have seen nearly identical returns if they had owned the coveted Class A Share conglomerate themselves.
A large portion of Berkshire Hathaway’s success this year cannot even be attributed to organic operations, but due to President Trump’s revision of the US tax code. “The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations” wrote Warren Buffett in his 2017 annual newsletter. “The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code”. What investors can take away from this meeting is a lesson in prudence, as luck defined is nothing more than when preparation meets opportunity.
What Companies Does Warren Buffet Own
Berkshire Hathaway’s objective is to acquire other companies, historically large blue-chip stocks, in order to expand its portfolio for the purpose of outperforming other indices. As arguably the 9th largest conglomerate in the world, Berkshire Hathaway either owns a majority of the outstanding stock of the companies it has not yet acquired (e.g., Southwest and American Airlines), or flat out owns that company in its entirety (e.g., Geico and Dairy Queen). Berkshire itself does not produce any goods or services, but outright owns shares of other companies in order to form a corporate group (i.e., Berkshire Hathaway itself).
So why does the average investor care? They don’t, especially when they can go out and purchase shares of a mutual fund, as they too own shares of outstanding stock of select companies in order to mirror or outperform and a given index, and also provide you a myriad of investment options that Berkshire Hathaway cannot provide.
For the intraday trader, Berkshire is worthless, as Class A shares have never been split, and never will be according to Buffet’s direction. As a result, Class A shares closed today, Feb 27th, 2018, at $314,345 and are highly illiquid compared to the companies that make up the conglomerate. Factor in an average bid/ask spread of $18,000, and most intraday traders will never touch this stock.
Options traders will find no interest in Berkshire, as there are none for Class A shares. Class B shares do have options, however, the underlying holdings are so diversified, no different than the Class A shares, that options traders could find much better volatility elsewhere.
For the long-term investor, Berkshire Hathaway would be a great option except for one thing, the Berkshire Hathaway stock price itself. Unfortunately, most Americans will not retire millionaires. And for those who do, having more than 5% of your total net worth in a single stock is reckless from an investment standpoint, just ask the employees of Bear Stearns who had their entire 401K’s vested in the company’s stock.
The reality is for most investors, mutual funds and ETF’s will by and large already accomplish what Berkshire Hathaway has achieved, and provide you more liquidity and more options to boot.
The Most Powerful Course of Action You Can Take
What Warren Buffett said at the 2017 annual meeting was just as important as what he neglected to mention. The Federal Reserve was never mentioned once, despite Federal Reserve Chairman Jerome Powell testifying before Congress today regarding the coming interest rate hikes, an appointment with Congress known well in advance of the 2017 annual meeting. Tax cuts were only mentioned once, albeit to the tune of 29 billion in tax savings under President Trump’s tax cuts, and no predictions were made as to what the rest of 2018 holds in store for the economy.
If investors can take away anything from the 2017 annual meeting, it should be this: The economy is entering into a period never before seen in history; not since John F. Kennedy took the United States out of recession by implementing tax reforms not seen since Franklin Roosevelt’s New Deal. As the burden of over federal regulation and excessive repatriation taxes are lifted, the US economy can no longer remain stagnant any longer.
Taking your investment cues from when Berkshire Hathaway is ready to buy is not always a recipe for success. It is not a superhuman feat to invest wisely and live abundantly, it is merely a strategic one. Besides, was it not Warren Buffet himself who said: “It is not necessary to do extraordinary things to get extraordinary results.” You do not need a Warren Buffett portfolio to live abundantly, you merely need the mindset.