It is that time of the year when the sage of Omaha speaks. Legendary American investor Warren Buffett writes to shareholders once a year while presenting the company’s annual report. The letter is a yearly ritual for his fans and followers. There are discussions on things he says in those letters, from gold to interest rates, besides value creation and destruction issues. Over the weekend, he wrote his 58th annual letter. For many people, it is a lifetime.
Depending on your objectives, you can interpret his letter to shareholders. We will focus on investing and personal finance lessons you can take for managing your finances for this column. While explaining the $144 billion cash and cash equivalents, Buffett says in this year’s letter that $120 billion is held in the US Treasury Bills, all maturing in less than a year. The company accounts for 0.5% of the publicly held national debt. His target is to keep more than $30 billion worth of cash and equivalents at any point in time. “We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). He argues that he and his partner Charlie Munger wish to sleep well at night and want their creditors, insurance claimants and shareholders to do so too.
Their minimum cash holding threshold set is $30 billion. Berkshire Hathaway is holding way more cash than needed. He attributes that to a lack of exciting investment opportunities, among other things. The personal finance lesson is that ‘Cash is king’. Having a good amount of liquidity in the bank sets you up for opportunities. Buffett uses his cash judiciously to buy businesses when prices are low. However, when prices are high, the company lies low and does not rush to deploy the surplus. In the case of your finances, you need to identify investments that are reasonably valued. You need not deploy surplus cash into risky assets like equity shares because you have surplus cash. If you regularly follow financial markets, you know that there are instances when share prices fall sharply for reasons other than company fundamentals.
For example, the share prices of many large-cap Indian companies corrected sharply over the past few weeks. A primary reason for that is the fear of a sharp spike in the inflation rate in the US and other wealthy countries. The Russia-Ukraine crisis adds more fuel to the fire. If you go by the commentary on corporate results for the quarter ended December 2021, most Indian companies have managed to meet market expectations on profits or exceed them. While the outlook for equities may not be as spectacular in 2022 as in 2021, no forecast suggests businesses’ earnings would do poorly.
Direct investing is not for all. However, if you do that regularly, building a sizeable cash reserve makes sense. To become a meaningful investor in the stock market, you need to be ready to invest when the opportunity opens up. The immediate challenge for the young and those looking to invest is managing a monthly surplus. Warren Buffett leads a frugal life. He was not a technology wizard like many other wealthy billionaires in America. Instead, Buffett has invested in businesses at the right time.
For example, in 2008, at the peak of the global financial crisis, he turned into an aggressive buyer and picked up sizeable stakes in some marquee US banks. He bought shares of these entities when nobody wanted to buy banking sector shares. He also realised the importance of value created by other businesses over the years. A 5.6% stake in Apple accounts for nearly half of Berkshire’s investment portfolio of $350 bn. Price is what you pay, and value is what you get. For nearly 60 years, Buffett has followed that mantra to get rich slowly.
(The author is editor-in-chief at www.moneyminute.in)