No. of Recommendations: 13
I thought this was interesting given the author is a highly respected financial journalist:
Stipple of Jason Zweig
Awash in Cash
By Jason Zweig
Fellow investors,
Warren Buffett's Berkshire Hathaway is piling up cash at what I believe is the fastest clip in the history of corporations.
A year ago, Berkshire had an already stupendous $157.2 billion in cash and short-term investments. By this Sept. 30, the company had more than doubled that hoard to $325.2 billion.
Never mind that with this cash pile, Berkshire could buy all of the 40 smallest companies in the S&P 500, combined, at their current market value.
Leave aside the fact that this mountain of cash is greater than the gross domestic product of 55 of the world's nations put together, according to the World Bank.
What I think is interesting is what the cash says about Buffett and Berkshire.
As Buffett's teacher and mentor, Benjamin Graham, wrote in the first edition of The Intelligent Investor in 1949:
A company’s management may run the business well and yet not give the outside stockholders the right results for them, because its efficiency is confined to operations and does not extend to the best use of the capital. The objective of efficient operation is to produce at low cost and to find the most profitable articles to sell. Efficient finance requires that the stockholders’ money be working in forms most suitable to their interest. This is a question in which management, as such, has little interest. Actually, it almost always wants as much capital from the owners as it can possibly get, in order to minimize its own financial problems. Thus the typical management will operate with more capital than necessary, if the stockholders permit it—which they often do.
Over the past six decades, Buffett has proven himself to be one of the best capital allocators ever to run a major company. He was able to avoid the conundrum Graham identified, thanks to his flexibility in finding opportunities. Buffett toggled back and forth between the public and private markets, buying stocks when they were cheap, as in 1974 and 2008, and buying private companies outright when the public markets were expensive.
Buffett showed that "the best use of the capital" was in his own hands.
But that was when he had mere millions or billions of cash to work with, not hundreds of billions.
Is it humanly possible to find enough undervalued investments to put a third of a trillion dollars to work? In a world where private-equity funds will pay any price and bear any debt burden to put their surplus capital to work, I'm not sure.
Shareholders aren't likely to complain too much about drowning in cash so long as Buffett remains in charge, but I think his eventual successors will have to initiate a dividend. I doubt they will have much choice.
