Tuesday, February 27, 2018

Buffett Isn't Buying

This past weekend, Berkshire Hathaway released its annual report for 2017. The part of it that really piqued my interest is on page four:
"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers...

...The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed." -- Warren Buffett
That piece right there goes to the heart of a suspicion that has crept into my thoughts on my investing plans going forward, that the markets are potentially in a period of irrational exuberance that is waiting for something to take it down. I suspect that the catalyst of that will be the Federal Reserve increasing interest rates and an end to the "easy money" policies that have been in place since the 2008-2009 crash (which, ironically, were established in response to that crash). Easy money has fueled mergers and acquisitions and stock buybacks, both being activities that can pump equity prices. Both can also be done at terrible valuations to the underlying value of the assets acquired when low borrowing costs make the cost of the debt "cheap" relative to the mediocre-to-poor returns potentially to be had on the acquired assets.

Debt acquisitions of the sizes involved here often have to be rolled over during the lifetime of the loans, however, and when interest rates rise, the music stops and there's one fewer chair to sit on...

So with the U.S. stock market hovering near all-time highs and this kind of activity rattling around under the hood, and watching the actions being taken by people like Buffett (he and Charlie Munger have allowed Berkshire's cash position to rise to $116 billion as of the end of 2017), I'm thinking that a hunch I had recently is one that I should follow: I'm going to stockpile cash for now, too.

A while back I wrote a bit about my 50 position Robinhood portfolio, which I hold for income. I have it in mind primarily for these thoughts I'm exploring. Typically I continuously invest in this portfolio as even at current market prices the yield on it is very attractive (as of this moment it's yielding 10.65% yield-to-value). Basically, when cash hits the portion of my budget that I dedicate to investing, my habit has been to do so, right away.

The dip the markets went on just a few weeks ago saw the yield of the portfolio jump above 11%. Equity prices quickly recovered after that brief event, but it may have been the initial shocks of something bigger coming, and I started to think, "hey... if we're heading for a big market correction, or even a crash, how much more could I earn on newly invested cash if I just wait a bit to plug it in?"

Of course, I don't know; no one knows the future. Maybe 11% is the best I'll ever see. Or maybe things go really nuts and I start seeing 14-15%, or more!

If we see a 2008-2009 event in the markets again, there could be some opportunities available like there were then when solid, growing yields starting out at 21% and today yield close to 40%!

So if Buffett is sitting on his hands, and it's more or less for reasons that I've lately suspected should prompt me to do the same, I guess I'll do exactly that. Once-in-a-lifetime yields are something that can only be taken advantage of if one has the means at their disposal to take advantage of them when they occur. As I wrote about the other day, I could tap into the credit that I have available to me to capitalize on such an event happening in the future, but until the opportunity actually manifests, there's no reason to take on debt (even at 0%) when I can just stockpile cash while I wait (and even earn a bit of interest on it in the meantime).

Had I been in this mindset in the past, I probably wouldn't have to bring this post to an abrupt close so I can force feed myself breakfast before I head out into the cold to go do some pest stuff, because I would have stopped trading time for money years ago...


When the time does come to execute on the thoughts I've laid out above, Robinhood is where I'll most likely make it all happen. It's a commission-free brokerage platform you can run on your smart phone. If you sign up through this link, each of us will receive one free share of a randomly chosen stock; I've actually received some dividend paying stocks this way!

No comments:

Search Paul E. Zimmerman.com

Disclosure Policy - Privacy Policy
jenna jameson chasey lain tera patrick briana banks sunny leone lanny barby stefani morgan savanna samson monique alexander cassidey