Berkshire Hathaway holds $147 billion in cash

On 26th February, Berkshire Hathaway announced its annual results for the year 2021 along with the Q4 results. In every annual report of Berkshire, one of the most awaited portion is the annual letter to shareholders penned by Warren Buffett. It gives glimpses into the personal investment though process of Buffett and also the overall investment strategy underlying Berkshire Hathaway.

For the year 2021, Berkshire closed with an investment portfolio value of nearly $352 billion, excluding the strategic investments like GEICO, BNSF and BHE. The top 15 stocks accounted for 89% of the total investment portfolio of Berkshire. What really stood out was that nearly 20% of the overall portfolio was held in cash. What explains this tremendous attraction for cash that Berkshire has shown?

As per the latest balance sheet presented by Berkshire Hathaway, it is sitting on a cash stash of $147 billion. Nearly 80% of this amount is held in US treasury Bills and that means Berkshire alone holds 0.5% of the total treasury bills issued by the US government. To quote Buffett, “Cash holdings are nearly 20% of overall investment holdings of Berkshire Hathaway, which is almost the peak cash holding at any time in the past. 

There is a reason for so much cash. Berkshire does not see sufficient value pockets in the current market. That has forced them more into cash holdings. Nobody matches the eloquence of Buffett when he says, “Even in the past, such huge cash positions have been unpleasant, but never permanent”. After all, Berkshire recently made several abortive attempts to find value in stocks like IBM and some airlines, with less than gratifying results.

If Berkshire is not finding enough investments, then what is it really doing? They are investing in Berkshire Hathaway. That is another way of saying that they are repurchasing stock. That makes sense when investment opportunities do not offer required margin of safety. According to Buffett, repurchase is the nicest way to increase ownership of shareholders in its various investments by reducing outstanding shares.

Just look at the imposing numbers. In the years 2020 and 2021, Berkshire Hathaway repurchased stock worth $51.7 billion, or 9% of outstanding stock as of end-2019. That is a good use of COVID lows. In the first 2 months of 2022, Berkshire has bought back another $1.2 billion of shares taking the total value-add to shareholders to $53 billion. That is a good way of giving the profits of the company to shareholders in the form of more wealth.

Remember, in investing, proof of the pudding lies in the eating

For all those, who are worried about too much cash in the books of Berkshire Hathaway, here is a quick test. Check out how much wealth Berkshire Hathaway has created for its shareholders since inception and compare with what the S&P 500 has generated. The results will not just surprise, but are bound to astonish you. If there is ever a tome to the power of active investing, it is here. Just check out the numbers.

Let us start with the S&P 500 performance. The index has grown at a compounded annual growth rate (CAGR) of 10.5% over last 56 years since 1965. Over the long term, the CAGR returns is a much better barometer of wealth creation and consistency. Let us fine tune this response with some real wealth numbers. A sum of $10,000 invested in the S&P-500 in 1965 will be worth $2.68 million as of the close of year 2021.

How does the Berkshire Hathaway story fare in comparison? Between its inception in 1965 and the year 2021, Berkshire Hathaway delivered CAGR returns of 20.1%. In other words, a sum of $10,000 invested in Berkshire Hathaway in 1965 is worth $285 million today. The Berkshire Hathaway stock has created 100 times more wealth compared to the S&P 500. At the end of the day, strategy is a means and returns are the end. That has been delivered!