When the ball dropped in Times Square at midnight on Dec. 31, we saw not only the beginning of a new year but also the end of an astonishing career as Warren Buffett officially stepped down as Berkshire Hathaway’s CEO.
While Buffett is a household name, his hand-picked successor, Greg Abel, is not. Abel has some pretty big shoes to fill as investors wait to see if he can continue Buffett’s stock-picking skills that earned him the nickname “The Oracle of Omaha.”
The Wall Street Journal recently ran a story, “The $358 Billion Question for the New CEO of Berkshire Hathaway,” and how to invest that incredible cash stash.
What a wonderful problem to have! The cash has been accumulated from investment earnings and Berkshire being a net seller of stocks for 12 quarters in a row.
Berkshire began cutting its huge stake in Apple, selling about 10 million shares worth nearly $2 billion while still holding 900 million shares.
Berkshire also made significant reductions in HP (by about 80%) and Paramount Global (by about a third). And Berkshire eliminated positions in StoneCo., D.R. Horton, Globe Life and Markel.
Note that Berkshire also made three big additions to existing positions in Chevron (began buying in 2020), Occidental Petroleum (after a 30% sell-off from a record high) and Sirius XM (after a sizable price decline and increasing its stake to 35% of the company).
It’s worth noting that these three stocks were all bought at favorable prices, consistent with the Buffett approach.
As someone who has long admired and followed Buffett, it seems clear that Berkshire is patiently looking for stocks cheap enough to invest in.
And with today’s high market valuations, Berkshire may have to wait. The S&P 500 is currently trading at around 27 times estimated forward earnings compared to long-term historical averages of about 20 times earnings.
And one of Buffett’s favored valuation methods shows that companies are currently trading at more than five times the value of their net assets — compared to a 10-year average of 3.9 times.
“Be fearful when others are greedy and be greedy when others are fearful.”
Warren buffett
While there are pundits who argue that today’s high valuations are reasonable based on predictions about the impact of artificial intelligence and pro-growth government policies, it appears the folks at Berkshire don’t quite see it that way.
Some investors believe that Buffett and now Abel have been waiting for a large market decline or even recession to create bargains in employing all that cash.
Right now, it appears Berkshire with Abel at the helm is being fearful at a time when many investors are greedily hoping for a fourth consecutive year of hefty stock returns.
We’ll see how and when Abel will pull the trigger to invest all that cash. If history is any indication, that day may come when markets tumble and others get fearful. Time will tell.
To me, all of this suggests the merits of employing a diversified approach to investing with a prudent mix of stocks (both U.S. and foreign), bonds and cash. Stay tuned.