Individual investors have been cutting back on cash in portfolios, the exact reverse of what Warren Buffett has been doing at Berkshire Hathaway.
Who do you think has got it right?
Cash at Berkshire Hathaway stood at just over US$55 billion at the end of June, an all-time high and two and a half times the level Buffett had said in the past he likes to keep on tap to meet extraordinary claims at his insurance businesses. It was also up more than 50 per cent year on year.
Buffett’s green pile is in sharp contrast to individual investors, who’ve cut cash in portfolios to 15.8 per cent, a 14-year low, according to the July asset allocation survey from the American Association of Individual Investors.
To be sure, businesses and individuals hold cash for different reasons, but Buffett has used Berkshire, in part, as an investment vehicle through which we can interpret his views on markets, or at least the prices of some assets in them.
Berkshire, of course, has some difficulties in putting cash to work that are not faced by your average dentist or lawyer, in that it tends to make very large investments and as such may need to be more patient than smaller fry. So it is quite possible it is waiting for the right acquisition to come along.
It is also similarly possible that Buffett is not happy with the prices, and is biding his time against a day when prices have been marked down. One thing not influencing Berkshire is tax policy, as all of its cash is generated in the US and it is not one of the legion of corporations holding money offshore to avoid a repatriation tax.
The bottom line, though, is that the best investor in the world is going in exactly the opposite direction to a class of people often reputed to be among the worst.
Cash returns are, as we know, lousy; the little that one can get in liquid instruments inevitably being lower than the toll extracted by inflation. And the long-term returns on cash are indeed terrible, lagging behind every asset class and investment strategy this side of setting money on fire.