What Warren Buffett Likes About Cash
Here’s a case for an inert asset. And what will self-driving cars mean for auto stocks?
By John Kimelman
If you’re like many investors, you view the cash portion of your investment portfolio as money to be quickly put to work.
By that thinking, a large cash position in percentage terms is taken as a sign that either you or your financial advisor has been asleep at the switch.
But a thoughtful piece by financial blogger Jesse Felder might make you think a little differently about the money market portion of your portfolio.
As Felder sees it, cash has now become the “most hated asset class on the planet.”
Felder, a former Wall Streeter and hedge-fund manager who now trades for himself, writes that investors are willing to accept negative returns on many asset classes right now rather than hold cash.
“This is totally irrational,” he adds. “The most obvious example of this is negative interest rates on many bonds around the world.”
But there’s also the rush into dividend stocks, he argues, even though those stocks may be trading at inflated values.
“All of this is indicative of just how desperate investors have become to abandon cash for anything with any sort of perceived yield,” Felder writes.
Well, not all investors. Felder points out that Warren Buffett is a big fan of holding on to large piles of cash at Berkshire Hathaway (ticker: BRKA, BRKB) that can be put to work at a moment’s notice. In the past two years, Berkshire at times has had more than $70 billion in cash on Berkshire’s balance sheet.
Felder quotes Buffett biographer Alice Schroeder, who has said of Buffett’s yen for cash: “He thinks of cash differently than conventional investors. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”
Felder adds that Buffett’s view on cash is fairly profound because “once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.”
On a different topic, Fortune writer Ryan Derousseau has written a story that attempts to answer a question on many investors’ minds: What will self-driving cars mean for the stocks of auto makers and related companies?
Derousseau makes a few interesting points, For one, he writes that this technological leap could make these stocks more resistant to boom and bust industrial cycles. He points out, for example, that U.S. auto makers are trading off of their highs in recent years because of declining sales numbers that may signal the end of a period of robust sales growth.
And he adds that investors should buy these falling stocks at even lower prices to take advantage of the next up cycle that could be driven in part by this technological transformation.
“While it’s far too early to pick winners in the self-driving-car arms race, the current down cycle in auto stocks could let investors place some early bets at bargain prices,” he adds.
The piece also addresses the pros and cons for auto makers of the coming driverless revolution.
Among the negatives: Fewer people would own vehicles, and more would rent cars only when needed.
“On the surface that sounds like a 70-car pileup in the making for automakers: Fewer car sales, after all, should mean less revenue,” Derousseau writes.
“But there are two factors that ease the pessimism. The first is that any shift will be both gradual and incomplete. Car-sharing works best in densely packed cities like New York or San Francisco, for example.
And autonomous driving won’t fit the needs of all drivers, so the automakers will still have a big traditional car customer base for a long time.”
The piece covers a lot of ground. But it leaves any investor with more questions than answers about what a profound technological transformation will mean for the auto sector.