Cash!

It’s been a long time! Sorry about that. Very often this year, I planned on posting more, but one thing after another keeps popping up. All good stuff, and it’s good that there is so much for me to do, but it does take me away from spending time writing here. As for markets and whatnot, I thought I would be spending more time digging for more interesting things, but as I said, I have sort of become a lazy investor in the past few years, just letting things that work ride. Why mess with what’s working? Of course, this has led to my portfolio becoming quite tech heavy, and as I said last year, I did start trimming some things, and I have done some of that this year too. And, in fact, this morning too (the market is up 1400 points! Congrats to the MAGA people!).
I have not been shorting at all over the past few years but I may start looking into it going forward. I don’t have any specific ideas, but it’s just a thought.

For the first time in a while, I feel like we may be coming closer to some inflection point of some kind. It feels like I am going to have to start rolling up my sleeves and do some work to find some other things (I am and have been fully invested all this time, but maybe time to move some things around). I remember a few years ago, I sold out of almost everything and started fresh and performance was really good. I guess it’s good sometimes to sort of clean out the closest! Anyway, I am not sure. If so, I will post here, of course.

Mean Reversion / Value

Over the past few years, people have kept talking about mean reversion to value and whatnot, but I have ignored that for the most part for the reasons I’ve been saying here. The growth / value spread just seems to me so much reflecting values being taken away from the old economy into the new one. Yes, sounds like 1999 bubble, but it just seems true. Retail just seems to be going down the drain, old school marketing / advertising just seems to be losing to online marketing etc. I shop more and more on Amazon, Costco online for things I used to run to the corner drug store to get; soap, shampoo, paper towels, whatever. I don’t even bother going to those places anymore because in NYC, they just lock everything up so you have to call staff to get it opened. But of course, to cut cost, they fired everybody so there is nobody around to open them for you. What’s the point?

Who watches linear TV these days? Except sports? There is just a massive transfer of wealth going on at so many levels, and the market sort of reflects that. So the growth / value convergence argument just sounds more like a long horse carriage makers / short auto makers trade. Well, OK, given that most auto makers that were ever launched has failed, maybe that’s not a good analogy.

The massive transfer of wealth has been going on for decades, or more than a century. Industrialization just sucked the wealth and value out of skilled workers / craftsman and transferred it to large corporations via factories. Formerly skilled workers were transferred into factories that required no skill (therefore, lower income). All the value-added accrued to the owners of the factories (capitalists). Same with national chain restaurants and retail. WMT transferred wealth from the local shops / restaurants to Arkansas; former store-owners end up having to work at WMT for lower pay (as unskilled workers). This is nothing new.

Now, the same thing is happening at so many levels at the same time that it is quite frightening. Just as a simple example, I’ve mentioned this before, but companies like Squarespace and Wix (or free options like WordPress) have sort of wiped out a large part of the web development world. People who knew a little HTML / CSS / Javascript might have been able to make a living not too long ago, but not now. All that ‘wealth’ is transfered to the companies that provide the platform for people to build it themselves.

Photographers are complaining for similar reasons. You no longer need to hire a photographer for low-end projects. You can just buy photos from various photos sites for very low prices, or even have AI generate the exact photo you need. I have used AI to generate artwork, photos and text in various volunteer work, and it is scary. I thought to myself, jeez, I would have paid an art student $300 for this 3 years ago; now I do it for free online via AI. Same with music. I can create my own music using AI with no skill / expertise at all, but just creating it via a prompt like, “A hip hop song with a Brooklyn 1990s vibe that talks about how value investing is dead”.

Everywhere you look, entire categories of work is just being completely wiped out, and all that ‘value’ or ‘wealth’ is simply transferred to the owners of the technology that provide the platform to do this.

Anyway, I know I’ve talked about this stuff before and I’m just repeating myself, but this is why when people say the stock market as a percentage of GDP is going up, the concentration of stocks in the market is getting too high etc., I think it is obvious that this is happening because the wealth and value is actually being more and more focused and concentrated, so the market is only reflecting reality. I don’t think it’s a stock market problem. It might be a social problem, political problem, or whatever. But to me, it’s not really a stock market problem. Wealth is actually being transferred to these top tech companies on a massive scale, and they are gaining more and more control.

Industrialization transferred a massive amount of wealth from laborers to capitalists. Now, big tech is taking everything over, and there is a massive transfer of wealth from labor and industry, even, to the technologists. OK, this seems a bit oversimplified, as industrialization has benefited more than just the owners of capital, just as technology is benefiting many more than just GOOG, MSFT and AMZN.

Munger

Yes, I know, Munger passed away about a year ago. Of course I thought about posting something but never got around to it as I didn’t really know what to say. I can’t add anything to what everyone has already written. I just hope Buffett is OK. The first thing I thought of was how this would affect Buffett.

Some of you younger folks may have missed this book, but I really enjoyed it when I read it years ago:

Buffett Liquidating!

OK, so getting to the topic of this post. Berkshire’s cash position has been a topic for a very long time. I posted something a while back about how that cash is actually not a drag on the BRK portfolio as it pretty much covers, dollar for dollar, BRK’s float. I created a similar table starting in 2013 to see what’s going on in that respect, since the 3Q 2024 (and earlier 2024 quarters) report has been raising eyebrows.

The table below is just some stuff I pulled from the 10-K’s. Loss lae is just that, the loss and lae (including from retro contracts), so this is not really the ‘float’ that Buffett talks about (which would include unearned premiums and other items), but I just use this as a lazy proxy… Close enough.

And you see that what I said years ago still held true from 2013 all the way, pretty much, through 2023. If you look at the excess of cash equivalents plus T-bills vs. my fake float, it has tracked closely, and has been less than 4% of BRK’s shareholders equity in most years. I know Buffett was asked about this at one of the annual meetings a while back and he said that it is a coincidence and that BRK does not intentionally hold cash to match float.

Anyway, look at 3Q 2024. Nuts! Cash went up to over $300 billion. Cash as percentage of shareholders equity is 51% vs. the usual range of 25-30% in the past 10 years. And cash excess over float is itself now $170+ billion, or more than 27% of BRK’s shareholders equity. So this is big.

Interestingly, though, equity holdings as a percentage of shareholders equity is still 43%, down from 69% in 2021, but it’s not a huge change from what it was in the 2013-2017 period.

Anyway, these percentages are not all that relevant, actually. I am just looking at it to get some perspective. Equity portfolio as a percentage of shareholders equity, as I said many times before, is not so meaningful when BRK owns so many businesses in whole. What’s the difference if BRK owns BNI as a stock (and shows up as an equity investment), or owns the whole thing outright (and doesn’t show up as an equity investment)? None, really. It’s still equity ownership.

Anyway, OK, so where am I going with this? Why does Buffett have so much cash on hand now, way more than before? Of course, nobody can say for sure. But some things do come to mind. First, Buffett did offer a hint that he doesn’t like asset prices up here, and is skeptical that rates can remain this low. Look at the fixed income holdings column. Despite long term rates going up to over 5%, back down to 4% and heading back up, he has not bought any bonds. Also, taxes are really low now, and he has said this is not sustainable either. He probably feels that tax rates will go up from here. So selling now and realizing a lower tax rate is not a bad idea, especially when his favorite stock is so expensive now.

But I don’t believe this is market timing, necessarily, either. He is just doing his usual thing. This large selling and huge cash pile may be more a function of how successful the Apple investment was, and how dominant it became in the portfolio. I know he is not the type to rebalance a portfolio because of too much concentration, but selling an expensive stock for a low tax rate before it may go up certainly feels right. If Apple didn’t do so well and get so big, would BRK have $300 billion in cash now? Nope. It is more about how incredible the Apple investment was rather than how bearish Buffett has become, I think. Without Apple, he would have had to sell his entire equity portfolio to raise cash so high. Instead of seeing this as a way to get more defensive by raising cash, it feels more like going back to normal after Apple boosted the equity portfolio so much (but again, he wouldn’t do this to rebalance. Definitely about Apple valuation and tax rate). As some fund managers say, the cash position is a result of investment actions, not the goal.

So I think the above is most of it, but something else nags at me, and that is something I thought about years ago. As he gets older and starts to slow down, I wondered if he would start to simplify the portfolio and sell things that might not be so great anymore and leave the next generation a more liquid, fresh slate to work with, so as not to have to worry about any sacred cows. But again, he is not selling AXP, KO or anything like that, so maybe this has nothing to do with it. But if he did start selling things like that, I would not think it’s a horrible idea.

Market Valuation

As for the market, my views haven’t changed at all. I still stick stubbornly to the old Fed model. I’ve heard the arguments against it, but it is what it is. I don’t claim this to be the correct theoretical fair value of the market or anything like that. I just use it as a sanity check for myself; if the Fed model is in line, more or less, then I am fine with the market. However, as I’ve said before, if the 10-year interest rate goes down to 1% (which it did), I don’t believe the market should trade at a 100x P/E ratio (which it didn’t). So there is some floor to this. And the market, to me, was rational post-crisis in not chasing down earnings yield along with long term rates. So, with the 10-year at 4%, I am fine with a market P/E ratio of 25x, and at 5%, 20x P/E sounds totally reasonable to me.

A lot of people a lot smarter and richer than me say the market is and has been overvalued, but I just don’t agree with them, unless long term rates move up a lot for an extended period of time.

Deficits

A similar group of very rich and smart people are saying that long term rates can’t stay low and they must move substantially higher due to these unsustainably large and growing federal deficits. Do I worry about that? Yes. But, I look to Japan as the model of an aging society and growing government deficits. Sure, there are plenty of differences (Japan is a high savings nation), but I still can’t get around the fact that slowing population growth and maturity of the U.S. economy would make growth harder to achieve going forward. Almost certainly, we can’t get back to the growth of the post-war baby boom generation. So given that, how do interest rates go up? Deficit-driven inflation? We haven’t really seen that in Japan, and even in the U.S. until Covid and Ukraine. So is the recent inflation really deficit-driven inflation? Or exogenous event-driven inflation? Maybe a combination of both.

This is not to say I don’t care about deficits. Of course it’s a problem, and we need to deal with it at some point. My opinion is just seeing things as an investor. I am just telling you why, as an investor, I am not yet concerned too much with the deficit and inflation.

This is not to say that we won’t have crashes or mini-crashes now and then, say, when a treasury auction fails (maybe for some technical reason or glitch), or some other trigger.

When I was in the hedge fund world, the Japanese bond market was known as the widow-maker, as so many funds lost so much money shorting JGB’s, mostly on the argument that their deficits are unsustainable. That is my analog / model when looking at this in the U.S.

Again, this is not a Cheney “deficits don’t matter” argument (he actually probably meant it only in the sense that it doesn’t matter for elections). Just a, “as an investor, deficits don’t matter”. Of course, at some point, this will lead to impacts on the economy and the stock market, but then we start to tread into economic forecasting territory, and we all know how that sort of thing ends.

CMG / CAVA

By the way, I posted about Cava not too long ago. It’s a great place to eat, and the stock is doing well. I don’t own it and am not particularly interested in it at the moment. I don’t need another CMG; I would rather look for something else.

But one thing I do think about when I walk past a Cava is that as much as everyone says it’s the next CMG, I don’t know if people realize that Cava now, even if it is just like CMG and is run as well as CMG (not sure about that, but let’s just say…), Cava is competing in a very, very different environment than when CMG was coming up.

I remember people coming up and asking me all the time back in the mid-2000s on, hey, is there another chain like CMG? Something that’s better than fast food, but faster than sit-down, full-service restaurants? At the time, I said no, not really… There weren’t a lot. Maybe Panera came up at some point.

But today, you walk around, and you have Sweet Green (I love the food), Just Salad, Shake Shack, Five Guys, and many, many other fast casuals / upscale fast food, that serve food above the traditional fast food quality. Food courts too have popped up all over the place serving decent quality food, even though those sometimes feel like mediocre food at super-high prices ($20 burritos etc…). But it is still definitely better than fast food!

Post More?

Yeah, I am tempted to say I will try to post more going forward, but I think I said that a year ago. One of the things I promised myself when I started this blog (what’s a blog?!) back in 2011, is that I will only post stuff when I have something to say. The sort of internal rule for me was that I would only post when something was meaningful enough and I did some work on something. This is why, going back, you will see that most of my posts will have some sort of table, chart or some data. What I did not want to do was to just post a bunch of opinions, rants, and things like that, that take no time. Often, that sort of blog just turns into an endless stream of rants about the same thing over and over again, with no additional information or added value.

So yes, I often see stuff and I will want to say something, but if it’s just some criticism of this or that, that is not even actionable or interesting, I won’t post it. It’s just a waste of everyone’s time.