Does Buffett also believe that cash is king? Purchase | Q2 | Cash | US Stocks | Investment | US | Berkshire | Buffett

Although the US stock market has shown impressive gains this year, Buffett and his team have significantly slowed down their spending, and their cash reserves are approaching historic highs. Berkshire's cash reserves have always been a barometer of the market, and many investors see Buffett's company as a microcosm of the US economy. However, this does not mean that Buffett has changed his investment philosophy. Others fear me for being greedy, while others fear me for being greedy. Perhaps the risks seen in the market are not risks for Buffett, and opportunities may not necessarily be opportunities for him.

Near the highest in history

Since the beginning of this year, the US stock market has shown strong performance, with the S&P 500 index up 18%, recording its best performance for the same period since 1927. The Nasdaq index has risen by 34%, and the Dow Jones index has also risen by 6%. However, based on past historical trends, the "August curse" has always been a nightmare for US stock investors: US stocks usually perform poorly in August, especially before the election year.

Warren Buffett, the stock god, is also wary of overvaluation. In the second quarter, Berkshire Hathaway, an investment group under Buffett, sold a net $8 billion worth of stocks, while the pace of repurchases also slowed down. By the end of June, Berkshire's cash and short-term treasury bond bonds, or so-called cash reserves, had reached $147.4 billion, close to the highest level in history.

When Berkshire's total cash and treasury bond bonds increase, it usually indicates that Buffett has not found many transactions in stock market investment or acquisition. "The story here is about interest rates and stock valuations," said Jim Shanahan, an analyst at Edward Jones. "The profitability impact of high interest rates on investment income is offsetting the economic weakness caused by the same interest rates."

In terms of holdings, Berkshire sold $12.55 billion worth of stocks in the second quarter and only bought $4.57 billion, making it a net seller of stocks. At the end of the second quarter, the fair value of Berkshire's equity investment was $353.4 billion, and the concentration of the five major holdings - Apple Inc., American Express, Bank of America, Coca Cola, and Chevron - increased to 78%. It is worth mentioning that the market value of Chevron's holdings in the second quarter decreased by 7% month on month.

However, this does not affect Buffett's ability to make money. The report shows that Berkshire achieved revenue of $92.503 billion in the second quarter, compared to $76.201 billion in the same period last year; The net profit attributable to shareholders was $35.912 billion, compared to a loss of $43.621 billion in the same period last year; Operating profit reached a record high of $10.04 billion, a year-on-year increase of 7%.

In addition to strong profitability in the insurance business, the company's profit turnaround also benefited from investment returns. Berkshire's investment return on equity securities holdings in the second quarter was $24.2 billion, with a total first half earnings of $47.6 billion. In the same period of 2022, Berkshire suffered a huge loss of $53 billion in stock trading, and a loss of $53.8 billion in the first half of last year.

As of the end of the second quarter, Berkshire's total assets reached $1041.573 billion, breaking through $1 trillion for the first time, compared to $997.072 billion at the end of March. Berkshire's current market value ranks eighth in the US stock market, only behind Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta.

"No need to do anything"

An X user shared a chart showing Berkshire's cash reserves soaring to near historic highs and commented, "What do you think Warren is preparing to do?" Bill Smith, an investment manager at Smith Capital Management, said, "Buffett holds much more cash than when he sees cheap goods everywhere."

Edward Jones analyst Shanahan pointed out that Berkshire sold a net of approximately $8 billion in stocks in the third quarter, most of which may have been Buffett's previously disclosed decision to sell most of Berkshire's holdings in Activision Blizzard. The current high stock price, coupled with economic weakness and rising interest rates, may leave Buffett in a largely wait-and-see state and unlikely to make any major transactions in the near future.

Musk responded in this post: "He really doesn't need to prepare for anything. The so-called 'risk-free' interest rate provided by short-term treasury bond is absurdly high." Musk commented on Buffett's massive purchase of U.S. short-term treasury bond last week, thinking that this is something that can be done without thinking.

However, in the view of independent international strategy researcher Chen Jia, Buffett has never, nor has he changed his investment philosophy this time. On the contrary, he is using the US bond market to strengthen his long-standing value investment strategy. "Due to a series of issues such as the Federal Reserve's excessive interest rate hikes, debt ceiling, and Fitch Ratings downgrade over the past year, US Treasury bonds are currently experiencing a deep price trough. Following Buffett's consistent practice of buying on dips, this is the best time for Berkshire Hathaway to purchase US bonds, increase debt and reduce equity, and optimize its allocation."

As we all know, Buffett does not like long-term US treasury bond bonds, because Berkshire's portfolio adopts a "barbell strategy", that is, investing in cash and stocks. Last Thursday, after Fitch, the international rating agency, downgraded the US rating, Buffett said in an interview that he was not worried about this and that he was buying US short-term treasury bond bonds on a large scale. He said: "Berkshire bought $10 billion of U.S. treasury bond last Monday, and another $10 billion this Monday. The only question next Monday is whether to buy another $10 billion of three-month short-term debt or six-month short-term debt."

Chen Jia further analyzed that Buffett's increase in cash holdings in the form of US Treasury bonds has always been a precursor to making major moves, because in history, when he needed a large amount of liquidity, it was often when he subjectively needed to increase his holdings of long-term assets and objectively helped to calm market volatility—— This is the true meaning that Wall Street and other European and American markets believe that Buffett's cash reserves are a barometer of the market.

Another bearish factor

The market indicator known as the "Buffett Index" has recently jumped to 171%. Buffett once stated in an article in Fortune magazine in 2001 that when Buffett's index is 100%, it indicates that the valuation of US stocks is reasonable. Buying at a level of 70% or 80% may be good, but buying US stocks around 200% is equivalent to playing with fire. Buffett once praised his eponymous indicator as "possibly the best single indicator to measure the valuation of US stocks at any given moment.".

Based on the current situation, the US stock market has indeed encountered bearish factors again after entering August. Last week, Fitch cut the credit rating of the US government, causing the yield of 10-year US treasury bond bonds to jump to 4.12%, a new high in 2023, while US stocks fell for several consecutive trading days. The Nasdaq and S&P 500 have fallen by approximately 2% since August, while the Dow has fallen by approximately 1%.

Chen Jia frankly stated that Buffett's move this time has fully demonstrated from the side that the long-term credit of the US government and the international status of the US dollar system have begun to loosen, because Wall Street knows that Buffett is a "big gun" and will only use it in critical moments. However, Bill Ackerman, who is almost completely opposite to Buffett's investment philosophy, has recently purchased short options on US bonds multiple times, attempting to replicate the epic arbitrage gains achieved by shorting the US two years ago.

Another user posted a comparison between Buffett's purchase of short-term US bonds and Ackermann's approach. Ackerman responded: "We are actually the same. Buffett will never buy 30-year US treasury bond bonds at a price close to the current yield. His purchase is just to use short-term treasury bond for cash management. We also invest cash in short-term treasury bond."

In addition, Berkshire also disclosed the latest developments of its multiple subsidiaries under its management. The report shows that Geico's pre tax underwriting profit for the second quarter was $514 million, marking the second consecutive quarter of profit after six quarters of losses, due to an increase in average premiums, a decrease in accidents, and a decrease in advertising expenses offsetting the decline in effective policies.

Berkshire Hathaway Energy's overall profit remained largely unchanged year-on-year, at $785 million. But Berkshire stated that its subsidiary, Pacific Power Company, may face a fine of $1.02 billion due to a series of wildfires in Oregon in 2020, of which $608 million is not covered by insurance.

In June of this year, a jury in Oregon, USA ruled that Pacific Power Company was responsible for the aforementioned case, ordering the company to pay tens of millions of dollars in compensation to 17 homeowners who filed lawsuits and assume broader liability for damages. Pacific Power Company stated that it will appeal against this.

Beijing Business Daily reporter Fang Binnan and Zhao Tianshu