Three Reasons Buffett’s Not Buying

Berkshire Hathaway’s cash position is back up to $40 billion. The media’s take is that he has so much cash that he doesn’t know what to do with it.

I think he knows exactly what to do with it – nothing.

I’ve been following Buffett for fifteen years and have read almost everything notable he’s ever said or written. I think there are three primary reasons he is content with letting cash build for the moment and not buying anything:

1. He doesn’t have to. Warren doesn’t feel compelled to “play” any given themes or keep up with a particular benchmark for any specific short-term period of time. He judges his and Charlie’s success based using several metrics, one of which is book value – did he grow the underlying value of the business itself or not? The company will not pursue deals or transactions that do not help accomplish this objective, period.

2. Markets are not cheap. Like other notable value investors, Berkshire does not see a plethora of great opportunities owing to the tremendous rise in virtually every investable asset class and sector. Buffett is known to buy panic. His crisis-era transactions – buying the country’s largest railroad in 2009, extracting enormously profitable convertible preferred deals from GE, GS and BAC, etc – have been so insanely successful that he can sit back and simply collect the profits and bide his time. Warren and Charlie run into burning buildings with their wallets out, they don’t scan the real estate listings for mansions during a bull market.

3. He could pounce at any time. The next big dislocation in the stock market probably comes as a result of something the Fed ends up doing – whenever that is. A gradual end of QE won’t necessarily be fatal to the economy, but it could be short-term detrimental to the stock market, it could even cause a massive correction or cyclical bear market (most of which last less than a year) . Warren looks forward to events like these while most investors live in fear of them. That’s why he is who he is and we are not.