To paraphrase the late Ed Sullivan (Sunday night Ed) the really big news right now is a question: why is Warren Buffet hoarding cash. His shareholder letter is eagerly awaited for insights into his thinking and, perhaps an inkling of what’s to come in terms of the market and the future of everyone’s investments. To save you the trouble of looking up the current (when it comes) as well as his past letters, let me advise this is what he is likely to provide in the way of a prognostication: "I have no idea what the market is going to do in the near term!" So, if he doesn’t know, what am I a rank amateur supposed to do? Here are some thoughts about Warren’s strategies (really Berkshire Hathaway’s [B/H]):
Warren doesn’t invest as you or I for a very simple reason: he has a totally different time horizon than you or I. He’s not investing for retirement or to fund children’s or grandchildren’s educations or to assure a surviving spouse a decent future or even some end of life charitable intent. His time horizon is multi-generational. He’s not investing for himself but rather a corporate entity that he hopes will be functioning as an economic enterprise a hundred or even two hundred plus years in the future.
He doesn’t invest in common stocks as you or I. He positions his cash not so much to buy shares of any specific company, but rather to buy an entire publicly traded company (i.e. Burlington Northern, Lubrizol, et al) or in some private transaction where a company owner is looking to sell his/her company to a friendly buyer (i.e. See’s Candy, Midwest Furniture Mart just to mention two of his private acquisitions).
He is the go to guy for companies looking for credibility in difficult times: Salomon Brothers and more recently during the 2007 – 2008 meltdown Goldman-Sachs, where he bought privately a huge amount of convertible bonds (convertible into common stock at a very low price – where he wound up making out like a bandit when things recovered. He also bought into others quite favorably). Of course, this is an investment course of action and investment opportunities that are not available to the likes of you and me (-- except indirectly via owning shares of B/H.
These are only a few of the differences between him and the rest of us. But he does and has shared his recommendations for how we should be investing. Even more to the point, this is a course he has publicly recommended for his heirs. Simply, invest passively which is exactly the course we follow managing our clients’ accounts – and I’d also point out, my own personal and family’s accounts!
The formula is really simple: diversify across global asset classes, structure the portfolio according to the level of risk you are willing to be exposed to, rebalance systematically and remain disciplined to stay the course and follow the strategy in good times and bad. Being a disciplined investor, if you can remain so, would be the one important characteristic you and I can share with Warren Buffet -- no crystal ball required!!