Berkshire Hathaway – What to make of the $397 billion cash pile?

In the fund management business, plenty can often be a problem, especially if you are sitting on idle cash. In the case of Berkshire Hathaway, they are sitting on a cash stash of $397 billion, because Berkshire finds equities too steeply priced.

Losing out the best time for equities

In retrospect, investors will only notice one thing; Berkshire Hathaway missed out the 3 most lucrative years for the US markets. This is a period when the US equities were among the best performing asset classes globally. If you look at the last 3 years since Berkshire started accumulating its cash stash, the Dow Jones Index is up 45% while the NASDAQ index is up a whopping 76%. Even if you consider the fact that Buffett was wary of technology stocks, they also missed out on the rally in the broad-based Dow. That is not something the investors of Berkshire will be too pleased with.

How long can you ignore Big Tech?

If you look at the 10 most valuable companies in the world by market cap, the top 9 companies are technology companies with a combined market cap of over $27 trillion. That is the big American story that Berkshire Hathaway has missed out. The one stock that has really created value for Berkshire Hathaway in the last decade was Apple. Hence it is quite surprising that Berkshire Hathaway has not shown the same enthusiasm in expanding its technology franchise. What really stands out is that the cash holding is nearly one-third the total assets under management (AUM) of Berkshire Hathaway. Greg Abel is surely going to have a tough time explaining this to shareholders.

Greg Abel is not Warren Buffet; nor Charlie Munger

Greg Abel is a manager, not a founder of Berkshire Hathaway. That was already evident, according to reports, at the latest annual meet at Omaha where the level of investor enthusiasm was much lower. However, getting into big shoes was never going to be easy, and that is what calls upon Greg Abel to look at a serious pivot in strategy that is in tune with the new equity market reality. Berkshire Hathaway, in the past, had been wary of most tech trends ranging from PCs to operating systems to social media to big data. It continues to be sceptical about the investment potential of artificial intelligence (AI), an area that has grown by leaps and bounds in the last few years.

Berkshire Hathaway cannot live on past glory

For a long time, the story of Berkshire Hathaway was about great stock picks like Coca Cola, American Express, Bank of America, Chevron, and Kraft Heinz. That part of the story is done and dusted. Warren Buffett captured the industrial and services era better than others. In the last 20 years, the one profitable stock pick for Berkshire Hathaway has been Apple. Even in that case, the entry was pretty late, and it is still a hardware company. Under Greg Abel, Berkshire needs to tune itself to the times. Sitting on $397 billion in cash is unacceptable. It has to find ways to use the money and that means getting to grips with the emerging tech opportunity. For Greg Abel, it is a Hobson’s Choice.