Author Topic: Berkshire cash position  (Read 2140 times)

compoundsnowly83

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Berkshire cash position
« on: December 21, 2018, 07:21:36 AM »
Just curious how others view Berkshire's cash position percentage. I think the correct framework would be to take the cash position as a percentage of the market cap which get to a little over 20% but want to hear other perspectives of why this is not correct.


marazul

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Re: Berkshire cash position
« Reply #1 on: December 21, 2018, 07:44:38 AM »
I think this overestimates the amount of excess liquidity or net cash Berkshire holds. Important to understand that float is also a type of leverage. So Berkshire has (rough numbers) $120bn of float and $100bn of cash. So +100% of the equity is in wholly owned businesses and public equities. Also, Buffett has mentioned he planes to keep $20bn in cash at all times.

Dynamic

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Re: Berkshire cash position
« Reply #2 on: December 21, 2018, 08:30:47 AM »
I guess it depends on what kind of analysis you're trying to do.

I used to wonder if there was a cash drag, perhaps compensated by its optionality to make opportunistic acquisitions and provide capital on attractive terms in times of distress, like the BAC convertible warrants.

Now, in the light of some blog posts from a year or so ago that occasionally show up on Twitter, it seems quite sensible to compare the cash balance (minus the $20 billion kept in hand at all times to cover mega catastrophe losses) to insurance float. We know that float is long lasting, and at worst would probably decline about 3% per year, and more likely will continue to grow at about the same compound rate as the company overall (e.g. it's Book Value and Intrinsic Value) partly depending on market conditions for insurance and reinsurance. The long tail insurance lines seem particularly useful in ensuring long duration float persists, and the growth of GEICO while maintaining its low cost structure also contributes valuable, growing float at sub zero cost in the long run, thanks to wise incentives to maintain underwriting discipline rather than chase market share at the expense of such discipline

Over the last 2 decades or so, float and excess cash balance have been remarkably close to 1:1 over most of the time, except at times of great opportunity, when the cash balance shrinks as it is deployed into very attractive acquisitions and partial ownership positions, warrants etc. Such times include 2008-9 Global Financial Crisis and other market crashes in the early 2000s.

On another thread someone posted a comment from Buffett where an Annual Meeting questioner raised this point, and he said it was more coincidental than by design, but it seems clear that his prudent capital allocation has historically led to this approximate relationship.

As such I now consider that cash is not a drag on returns as it's almost entirely money that Berkshire doesn't own, but gets to use until it has to be paid out. In times when exceptionally attractive prospective returns are available with a high margin of safety and very limited downside risk, this float funded cash may be largely used up generating returns far in excess of the cost of float (which has been negative for the best part of two decades now) and generating additional income that will rough the cash balance. The rest of the time in normal markets, float seems to generate a more modest positive return thanks to its sub zero cost and to interest on short term cash and treasuries that roughly match float.

Berkshire seems remarkably consistent at growing both Book Value per share and Intrinsic Value per share at around 10-11% compound in the long term since rates became so low, plus a one time boost from the tax cut. This seems to equate to inflation plus 6-9% in my estimation, with particularly good returns coming after times of market distress.

Most of the subsidiaries don't grow at such high compound rates as the whole of Berkshire, but generate so much free cash beyond their internal needs for capital and ability to reinvest it at attractive rates of return (the exceptions being railroad and utilities, which also get non recourse debt leverage due to their stability) that it gets invested into acquiring new business or shares in publicly traded businesses at those attractive rates of return.

All the while, Berkshire has a diverse set of highly cash generative subsidiaries in many important parts of the economy coupled with prudent management that won't bet the farm to try to sustain targets on returns and growth - there are none - but instead waits patiently for the fat pitches and otherwise aims to preserve capital and sustain moats.

compoundsnowly83

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Re: Berkshire cash position
« Reply #3 on: December 21, 2018, 09:06:01 AM »
I am trying to get a sense the way risk is being managed.

My math in the basic example above of taking cash divided by market cap (should be enterprise value) was using market cap as a conservative proxy for intrinsic value.  I agree that it should likely be (cash less $20bn) / intrinsic value.  I don't think using the enterprise value in this example eliminates the debate of float as whether it is an asset or liability.  I personally believe that the float needs to be treated when measuring the business based on book value but when looking at normalized earnings and the pass-through earnings of the securities, float should be treated as a typical working capital account and should not be treated as a debt-like item.

IceCreamMan

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Re: Berkshire cash position
« Reply #4 on: December 21, 2018, 11:03:08 AM »
You may want to take note of the liability side of the balance sheet, too. If Berkshire used half of its cash to pay down debt tomorrow, your cash as a % of market cap measure would drop by half.

Spekulatius

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Re: Berkshire cash position
« Reply #5 on: December 23, 2018, 07:38:38 AM »
Itís hard to know what BRKís excess cash really is. The insurance subs need to hold some of their float in cash. just based on casually looking at some balance sheets, most Insurers hold about 15% of their float in cash and short term investments. Now, BRK is not an insurer, but a conglomerate. They also buy securities in size both at a holding level as well as with cash from their insurance subs.
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