- Berkshire Hathaway cash pile drops slightly in second quarter to end a run of eleven straight increases
- Equity allocation rose slightly
- Exposure to fixed-income and US government debt remains minimal
- Share price continues to slide in wake of Warren Buffett’s retirement announcement in May
“Berkshire Hathaway’s decision to take a further big write-down on its stake in Kraft-Heinz may be grabbing all of the headlines, but two other important trends may mean more over the long run,” says AJ Bell investment director Russ Mould.
"First, the investment vehicle has stopped building its cash pile, to end a run of eleven straight quarters that began in the third quarter of 2022 and doubled the amount of liquidity available. Second, the share price continues to slide, even as the US stock market rallies, to perhaps suggest that investors are yet to convince themselves that Berkshire Hathaway will be the same without Warren Buffett and Charlie Munger as it was with them in charge.
“The slide in Berkshire’s share price since Warren Buffett’s announcement on 3 May that he will retire at the end of the year is noticeable, especially in the context of the rapid rebound in the benchmark S&P 500 index.
Source: LSEG Refinitiv data
“There have been periods in the past when Berkshire has lagged the S&P 500 only for its patient approach to accrue reward, and generate huge outperformance, over time.
“The period 1996-1999 was one recent, and glaring, example, as Berkshire did not engage in the scramble to buy tech, media and telecom stocks, only to evade the smash that came in 2000-2003. Performance also trailed returns from the S&P 500 in 2004-2006 when financial engineering, leverage and an alphabet soup of derivatives kept Wall Street happy until Main Street and the wider economy ended up footing the bill. Buffett and Munger pounced on the lowly valuations that prevailed after that market cataclysm and then outperformed handsomely again for the next decade.
Source: Berkshire Hathaway annual report
“This historical pattern may provide context for the current share price swoon. The markets are giddy about the potential of AI and related companies, while meme stocks and cryptocurrencies are also hot to trot, so far as investors are concerned. Berkshire has patiently accumulated cash during the latest frenzy, in a manner entirely in keeping with its long—proven methodology of taking greater care of its money when others seem increasingly happy to speculate with theirs.
“The net cash pile more than trebled to peak at $347.7 billion in March, up from $105.4 billion in June 2022. Even the slight dip to $344.1 billion in June this year could be in-keeping with Berkshire’s style, as it may have taken advantage of April’s post-Liberation day volatility.
Source: Berkshire Hathaway accounts, LSEG Refinitiv data
“Even so, Berkshire has markedly reduced its exposure to equities in the past three years and continued to shun the fixed-income market and US Government bonds.
Source: Berkshire Hathaway accounts. Investments only.
“Only time will tell whether the latest slide in Berkshire Hathaway’s shares is down to its investment style, which does not necessarily fit well with the market’s current preoccupation with momentum and growth stocks, or worries over how the company will do without either Buffett or Munger to guide it.
“But Buffett’s retirement does pose a challenge to those whose faith in him, his approach and his performance outcomes remains undimmed, a faith probed by American business writer and investor Morgan Housel in an essay six years ago when he commented:
‘Take the Berkshire Hathaway annual meeting …. its 40,000 people, all of whom consider themselves contrarians. People show up at 4am to wait in line with thousands of other people to tell each other about their lifelong commitment to not following the crowd.’”
