Warren Buffett has praised pessimism as an investor’s friend, but there’s only so much a friend can do.
As U.S. stocks rounded out the worst year since the financial crisis, Berkshire Hathaway Inc. spent less than US$2.2 billion on net purchases of common stock in the fourth quarter. That means its cash pile, which had remained above US$100 billion the last five quarters, probably stayed stubbornly high barring any unusually large amounts of repurchases. And that’s bound to raise questions about Buffett’s outlook ahead of Saturday’s planned release of the company’s annual letter.
Berkshire’s chief executive officer has struggled to find sizable and well-priced deals recently that could make a large dent in his cash problem. He hasn’t just been sitting around, instead snapping up shares of lenders including JPMorgan Chase & Co. and Bank of America Corp. But even in the third quarter, when he spent the most on net purchases of stocks in more than four years, cash stood at US$104 billion. Investors will get a glimpse of just how much money Berkshire had at the end of the year with Saturday’s letter.
“The cash is just coming in faster than he can deploy it,” David Sims, president of Sims Capital Management, which oversees US$50 million, including Berkshire Class B shares.
Buffett’s company took a step in 2018 to open up another level of capital deployment by loosening its stock-buyback policy. It was a critical change for a company whose CEO has long favoured spending money on common stocks or adding businesses to his $507 billion conglomerate. The change underscored just how hard it is for Buffett to put cash to work fast enough to keep up with the rising amounts of money that Berkshire accumulates.
“Things are expensive,” Meyer Shields, an analyst with Keefe, Bruyette & Woods, said in an interview. “Berkshire has traditionally been pretty cautious and pretty patient about not buying stuff that’s expensive. That’s one of the elements of their success and it’s the right thing to do.”
The buyback policy change last year only chipped away at US$928 million of funds in the third quarter, but more could be ahead. Morgan Stanley analysts are estimating US$2.5 billion of buybacks in the fourth quarter and US$10 billion in 2019.
Here are other topics that might come up in Saturday’s letter:
Buffett has warned shareholders about the “wild” swings that come from a new accounting rule that requires Omaha, Nebraska-based Berkshire to incorporate unrealized gains and losses in its stock portfolio into net income figures. That could contribute to $22.4 billion in net losses for Berkshire in the fourth quarter, compared to a profit of $32.6 billion during the same period a year earlier, according to Morgan Stanley estimates.
Buffett turned 88 in August and his longtime business partner, Charles Munger, celebrated his 95th birthday in January. That’s drummed up questions among shareholders about the next generation of leaders at Berkshire. The company promoted Ajit Jain, 67, and Greg Abel, 56, to vice chairmen roles last year, changes Buffett said were part of a “movement toward succession.”
Beyond that, Buffett hasn’t recently given many more clues about succession. He addressed the change in a few brief lines in last year’s letter, saying that “Berkshire’s blood” flows through Jain and Abel’s veins and that Buffett and shareholders are lucky to have the two executives.
Cathy Seifert, an analyst at CFRA Research, said investors might be pleasantly surprised if any more details are provided.
“I think investors’ thirst for information may not be quenched,” Seifert said in an interview. “The sense that I get is that they thought to put the issue to rest by elevating these two gentlemen. I will be pleasantly surprised, but I will be surprised, if there is a lot of explanation or a lot of a narrative outlining this.”
With the looming 2020 presidential election and constant chatter about the political divide in the U.S., it’s hard to avoid heated political debates. But Buffett has managed to tread lightly when it comes to political issues in recent years.
He supported Hillary Clinton in the 2016 presidential election, and then steered clear of digging deeply into President Donald Trump’s policies. KBW’s Shields said Buffett might acknowledge the political divide in the country while avoiding detailed commentary on heated political topics.
“I don’t think they’re looking to exacerbate that because there’s no business upside to it,” Shields said.
The letter might delve more into the U.S. economy than politics. Buffett has frequently championed the U.S for investments, saying the country’s “economic soil remains fertile.” But after a year of market volatility and heightened talk about a possible recession, will Buffett maintain his optimism?
Investors can also gather a sense of the U.S. economy’s health by digging into Berkshire’s underlying results. Over more than 50 years, Buffett and Munger have taken Berkshire Hathaway from a struggling textile business to a conglomerate encompassing the BNSF railroad, auto insurer Geico, Dairy Queen and other businesses. The company cuts across the U.S. business landscape and its earnings are increasingly tied to overall economic growth in the U.S., according to KBW’s Shields.
Munger has called health care one of the hardest tasks on Berkshire’s agenda. The company announced last year that it was teaming up with JPMorgan Chase & Co. and Amazon.com Inc. to tackle the problem for employees of the three companies.
In June, the venture named Atul Gawande, a surgeon and journalist, to lead it and has since hired key employees. Buffett has said the effort will try to deliver better medical service at a lower cost, but has also acknowledged the challenges. The trio haven’t divulged too many secrets about how the venture is working, so any commentary from Buffett could influence investors’ perceptions on the push. Signs of success would reverberate throughout the industry.