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For years, investor Warren Buffett has been piling up spare money.
When I say piling up money, I really mean piling up money – hundreds of billions of dollars, in fact.
But this is one of history’s most successful investors. Why is he not putting that money to use in the market – and might it be a warning signal for me as an investor?
Buffett has his own reasons
In fact, Warren Buffett has not been completely idle.
Indeed, his company Berkshire Hathaway recently announced an acquisition that will use around $10bn of its spare cash.
For most firms that would be seen as a significant move. It is a sign of Warren Buffett’s success as an investor that, even after shelling out $10bn, his cash pile will hardly be dented.
However, it does raise the question: why is Warren Buffett sitting on his hands much of the time rather than putting more of that huge cash pile to work?
The answer is: we may never know. Buffett has his own reasons for doing things and we may never fully understand all of them, even though he sometimes shares his thinking.
On top of that, what works for Warren Buffett might not work for other investors. We each have our own resources, objectives, and risk tolerance.
So just because he is or is not doing something ought not necessarily to influence my own approach. Indeed, Buffett himself has pointed out that there are opportunities for small, private investors that he would not longer touch purely because he has so much money to invest that such small investments would not “move the needle”.
Apple had made Buffett billions
That said, though, I do see some warning signs in Buffett’s approach in recent years.
Take Berkshire’s stake in Apple (NASDAQ: AAPL), for example. This has been its largest holding for some years – and remains so. But Warren Buffett’s company has sold tens of billions of dollars of Apple stock in recent years. It has then done little with that money to date.
That hardly seems like a vote of confidence. Then again, even after those sales, Apple remains a substantial holding in the Berkshire portfolio.
So, on one hand, this move can make sense. Buffett has been able to take vast amounts of profit off the table by selling part of Berkshire’s Apple stake.
With the growth in Apple’s stock price, Berkshire’s stake had become a bigger and bigger part of its portfolio. By reducing that stake, Buffett has been helping to keep the portfolio diversified.
That makes good sense. After all, Apple has faced growing price competition from Asian rivals. That could hurt its profit margins as well as its sales.
Money sitting, waiting
On the other hand, it still has lots of things we know Warren Buffett likes in a company, from a strong brand to a deep competitive advantage (or ‘moat’) thanks to its installed user base and service ecosystem. He has been selling its shares – but still retains a substantial stake.
So I do not interpret Buffett’s sale as a sign that he necessarily thinks Apple is overvalued.
I think he is staying diversified — as the canny investor he is — while continuing to look for opportunities to invest in great businesses at attractive prices. That seems smart to me.
