How should Warren Buffett invest Berkshire Hathaway’s $382bn?
Warren Buffett is into his final quarter as CEO at Berkshire Hathaway (NYSE: BRK.B). And Berkshire’s third-quarter update shows its cash climbing to a record $382bn.
The cash mountain has been growing for some time, as Buffett has been a net seller of stocks. It seems that continued into Q3, and we should have details of the quarter’s major trades by 14 November.
An easier natural disaster season than last year helped the insurance sector. And underwriting income climbed 216% from the same quarter a year ago, to $2.37bn. Once again, Berkshire didn’t buy back any of its own shares in the quarter.
What to do with it?
It’s tempting to think maybe Buffett is just winding down and not doing much, leaving his successor, Greg Abel, free rein to decide what to do. But he denies that. And it seems his investment decisions are still in line with his long-term philosophy.
So how might Berkshire have used its $382bn to further boost its shareholders’ wealth? I really only see three options.
One would be to invest in the stock market, taking up sizeable positions in companies that look good value. What is it Buffett says he’s always been on the lookout for? That’s right, he has his eye open for a “wonderful company at a fair price“.
I think it’s fair to conclude he’s not seeing that combination right now.
Hand it back
A share buyback can be a good way to boost shareholder value. It can raise future per-share measures. And that in turn can push the share price higher. But it’s probably best not to buy back your own shares if you think the price is too high.
Some analysts suggest Berkshire stock is trading at around 1.55 times book value right now. That’s above the longer-term range averaging around 1.45 times. But in uncertain times like these, I don’t see it as too stretched.
Powder dry
The third, and chosen, option is to sit on the cash. And a few months ago, Warren Buffett explained his reasoning.
He said Berkshire will invest “when something is offered that makes sense to us, and that we understand, and offers good value and where we don’t worry about losing“.
He also said: “Things get extraordinarily attractive very occasionally,” adding that at some time in the future “we will be bombarded with offerings that we’ll be glad we have the cash for.“
Patience is key
I think that sums it up. It’s simply that nothing Berkshire understands and would like to own is of sufficiently good value right now — and might not be for some time. And it lends support to the growing fear that a market correction might be in our near future.
So what should private investors do? Berkshire faces an uncertain period in its CEO handover. And if there is a market slump, its own stock could surely fall too.
But I still think long-term investors should consider Berkshire Hathaway stock. And let Greg Abel worry about what to do with the $382bn. He’ll know better than me, for sure.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
