No. of Recommendations: 18
For once I am very much in agreement with you!
Normally I would say something like "everybody is over-reacting to the size of the cash pile, it's not unusually large as a fraction of the size of the firm".
But this time it is. The normal high end of the range has gone up to about 36% of investments, and touched 39% twice. One of those times was during the pandemic so the number was distorted by the temporarily low market value of the equity portfolio. But the latest figure calculated the same way is 45%, which is indeed a pretty big fraction.
My own cash allocation is 68% at the moment, but it's not as if I'm moving around billions.
Of course, the rising cash percentage is primarily the flipside of falling allocations to fixed income. Equities as a percent of investments per share are 47%, pretty much spot on the 20 year average.
The equity allocation is lower than the 5 years average a pinch over 60%, but it's not a historically unusual level. At a high level the last few years, including this quarter, could be viewed mainly as a story of moving almost all of the fixed income allocation to the extremely short duration end, which we call cash, while keeping the allocation to equities in the usual 30%-60% range. We're in the middle of that range.
Jim
No. of Recommendations: 19
The cash pile is bigger (a long term trend) and also bigger than usual as a fraction of investments (somewhat anomalously so).
But a much less noticed trend has been the reduction of leverage. Berkshire is not a heavily leveraged firm, but they do have a bit of gearing. It looks higher if you include the non-recourse debt inside the utilities and rails as I do in this post.
As the cash has stacked up in recent years, besides T-bills one of the destinations has been retiring debt [as a proportion of the firm, not in absolute terms]. For example, Berkshire's nominal total shareholders' equity has risen at 10.9%/year in the last 8 years. The "gearing" debt (gap between that equity and total assets) has risen at only 6.00%/year: the debt wedge has been gradually shrinking as a result.
Picking a rather arbitrary past stretch as a leverage baseline, for period ends between 2013-Q2 and end 2018-Q4, total consolidated assets averaged 2.160 times equity. This quarter it is down to 1.843.
Phrased another way, Berkshire would have to borrow another $132.9 billion to be back to the leverage level that was normal a few years back. I think they would be happy to do so (and could easily do so) if they thought there was a good investment opportunity available. So for elephant hunting purposes the buying power isn't something like "the cash minus $80bn" or whatever. I think it is maybe $130bn more than that.
Jim
