- Berkshire Hathaway is sitting on a major cash pile. A major market crash would help Chair Warren Buffett deploy some of Berkshire Hathaway’s cash.
- Buffett is known to be a value investor. However, over the last few quarters, Berkshire Hathaway’s buying activity has been subdued.
Berkshire Hathaway’s (BRK-B) (BRK.B) cash pile has gradually increased over the last few quarters. At the end of the second quarter, the company was holding $122 billion in cash and cash equivalents. This cash is mainly invested in short-term Treasuries in the absence of compelling investment opportunities. Chair Warren Buffett isn’t a fan of parking money in debt instruments. Investments in Treasury securities add little value for Berkshire Hathaway.
Berkshire Hathaway’s cash pile
Berkshire Hathaway’s cash pile has increased gradually. Buffett surprised the markets by not adding many publicly traded stocks in the fourth quarter of 2018 even as markets plunged. Apple (AAPL), Berkshire Hathaway’s biggest holding, fell more than 30% in the fourth quarter.
Berkshire Hathaway’s buying activity has been modest this year as well. While the company added Amazon (AMZN) this year, the addition hardly moved the needle for its massive cash pile. Incidentally, it wasn’t Buffett but a different investment manager at Berkshire that took the Amazon stake.
Why Warren Buffett would love a market crash
On March 28, in an interview with CNBC, an interviewer asked Buffett if he foresees a recession. For context, back then, the US yield curve had inverted, increasing recession fears. Buffett replied, “I just hope I see a lot of recessions.” A recession or a market crash would help Buffett deploy some of Berkshire Hathaway’s cash pile.
We should remember that during the last financial crisis, Buffett jumped into the fray and deployed a lot of money. General Electric (GE) was among the companies that Buffett invested in during the last financial crisis. Berkshire Hathaway has since fully exited General Electric. Last year, there were rumors that Berkshire Hathaway might again take a stake in GE.
Warren Buffett and elephants
In this year’s annual letter, Warren Buffett said that he’s looking for an “elephant-sized acquisition.” In a nutshell, these are companies that Berkshire Hathaway intends to fully acquire. Precision Castparts was Berkshire Hathaway’s last major acquisition. However, despite Buffett’s openly admitting that he’s looking for a major acquisition opportunity, Berkshire hasn’t been able to seal any such deal. Buffett was optimistic about this in his annual letter. He wrote, “Prices are sky-high for businesses possessing decent long-term prospects.” A recession might just help Buffett find attractive investment opportunities.
President Trump wouldn’t like to see a recession
Meanwhile, US President Donald Trump might fear a recession, as he attaches a great deal of importance to the economy and the markets.
The US economy is doing relatively well. While US economic growth rates have come down, they should be taken in the context of a global economic slowdown. With a little over a year remaining ahead of the 2020 presidential election, the last thing Trump would want is a recession or a market crash. On multiple occasions, Trump has highlighted that the US economy is booming under his administration. A recession or a crash would provide Democrats with much-needed ammunition.
Buffett seems to disagree with President Trump on certain points, including the US-China trade war. He also took a dig at Trump in his this year’s annual letter. Read Warren Buffett Disagrees with President Trump for more analysis.