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When Will Warren Buffett Strike Next?

· Investing,Stock Market

When Will Warren Buffett Strike Next?

Berkshire Hathaway, the conglomerate holding company built by billionaire investors Warren Buffett and Charlie Munger, is currently facing some major headwinds. Buffett and Munger’s strategy of buying stable, predictable businesses and stocks and investing all the cash generated by those investments in even more businesses and stocks has been highly successful since Buffett took Berkshire over in 1965.

Indeed, from 1965 through 2018, Berkshire has averaged an oustanding 20.5% annual market return as compared to the S&P 500’s 9.7%. Today, with over $128 billion in cash as of the end of the third quarter of this year, and in the presence of the longest bull market in history, prices for businesses that Berkshire seeks to absorb are extremely high, making it difficult for Buffett and Munger to secure large acquisitions and feed Berkshire’s growth.

Even for stock market wizards like Buffett and Munger, it has become increasingly difficult to find good deals in the market, and the same can be said for individual investors working with small amounts of capital. Simply put, as the market continues to push prices higher, investors trying to invest in the stock market are getting less value for their money. As a consequence of Berkshire’s reluctance to use its enormous cash pile to make acquisitions and other investments, some Berkshire shareholders are beginning to grow frustrated.

Buffett and Munger have not merely watched this market advance over the years, though. In fact, they have deployed a considerable amount of cash recently. Back in April of this year, Berkshire supplied $10 billion to Occidental Petroleum to aid in its attempt to take over Anadarko Petroleum, and just a few weeks ago, Berkshire placed a bid to buy Tech Data, a Fortune 100 electronics distribution company, although it was outbid by Apollo Global Management.

Another way that Buffett and Munger have been fighting Berkshire’s never-ending torrent of cash is through share repurchases, albeit these have made a much smaller dent in Berkshire’s gigantic cash pile. During the third quarter of this year, Berkshire repurchased $700 million of its own stock, however, due to the sheer size of Berkshire, that accounts for a minuscule 0.1% of its market capitalization of roughly $550 billion.

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With Berkshire shareholders, the press, and other investors putting much pressure on Buffett and Munger to redress this problem, it seems that they cannot simply sit idle and wait for prices to fall like they have been largely doing since their major acquisition of Precision Castparts over three years ago.

And how about individual investors? Should they model Berkshire’s behavior by sitting idle and waiting patiently for the next market crash to invest their money? They may choose to do so, but if they do, they will have to resist the temptation to join the flock of investors mesmerized by quick, juicy returns that are typical of the late stages of a bull market. For Buffett and Munger, this may be easy, but for the rest of us, it will likely prove to be difficult.

Written by Jared Nussbaum & Edited by Alexander Fleiss