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The Equitymaster Research Digest

To Hold or Not to Hold Cash
Oct 14, 2016

Warren Buffett has a problem of plenty. Bloomberg reports that Berkshire Hathaway, Buffett's investment vehicle, is sitting on a massive pile of cash. Last heard, the cash hoard amounted to a staggering US$73 billion, the largest ever.

To make matters worse, the pile will continue to grow as long as the Oracle of Omaha doesn't make a major investment. And such a possibility looks remote given the current market conditions and Buffett's penchant for attractively valued businesses.

One of the big sources of cash for Buffett is the float his insurance companies generate every single day. In other words, the premium they receive from policy holders. We have before written about how this float is a great source of free capital.

In fact, a judicious use of float can make an insurance company's cost of capital positive. It's the only business we can think of that gets paid to invest its capital.

To understand this point in detail, download our special report on IPO investing. We have devoted a few pages in the report to insurance companies.

The Massive Advantage

Back to Warren Buffett's huge cash pile...why would he want to keep it on the balance sheet given that it earns absolutely nothing? Isn't investing in stocks or paying dividends a better idea?

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