My Aha! Moment at Saturday's Berkshire AGM

May 8, 2019

Rahul Shah, Editor, Profit Hunter

For over 10 years now, I have religiously followed the Berkshire AGMs.

And every year, it is an absolute delight to see two of my biggest investing heroes take questions from the audience and give out the most candid replies possible.

However, over the years, I've seen a tectonic shift in the way I've approached these AGMs.

The first few years, it was all about learning new insights and absorbing new ideas in the art and science of investing.

Of late, though, it has been mostly about reinforcing old lessons and getting the odd insight or two.

Why is this the case?

Well, Buffett and Munger have built the impregnable Berkshire fortress around a few core principles.

For the first few years you simply try to wrap your head around these core ideas and principles and let them ferment.

Once you are reasonably proficient with them, it all boils down to how you can use them over and over again to generate market beating returns.

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This is precisely what these two gentlemen have achieved.

The 2019 Berkshire Hathaway AGM was yet another event where for me personally, a lot of the core principles and ideas were reinforced.

The AGM wasn't particularly high on the Insight Quotient for someone who has been following it for well over a decade.

But it did pack quite a punch when it came to replaying the same old principles or using them to shine a light on new challenges and issues.

Source: YouTube

One of the questions that really stood out for me was about Berkshire's record high cash holdings.

A gentleman wondered if the more than US$ 100 bn cash that Berkshire is sitting on is better off being invested in a low-cost index fund than treasury bills where they earn next to nothing.

This, after having ensured that Berkshire maintains its minimum liquidity threshold of US$ 20 bn.

After having acknowledged that it was hard to argue against this point on rational grounds, Buffett went on to suggest what he has been suggesting for many years now.

Attractive opportunities in the stock market come in clumps and are not spread out evenly.

And there might come a time in the near future where Berkshire has the opportunity of closing deals worth more than US$ 100 bn in quick time.

Buffett wants to ensure that he has enough cash at his disposal to be able to swoop in and grab them by the scruff of their necks.

Remember the sub-prime crisis of 2008? The reason Buffett could make those big bets back then was because he had a large cash holding.

Perhaps he might not have been able to move so fast with an index fund the way he did by staying invested in T-bills.

Besides, the value of his index fund investments would have also gone down significantly in line with the correction in the stock market.

So, being parked in cash in a large way, gave him both sufficient liquidity when he most needed it, and downside protection.

Charlie Munger seemed to agree.

He straight away pointed out that he pleads guilty to being more conservative when it comes to cash than other investors. But this was not a sin as per him.

'We are not going to change' was his terse reply.

And they certainly shouldn't is my opinion.

More than five years of managing Microcap Millionaires has convinced me there's nothing like cash at the time of a crisis.

The enormous advantage of recommending subscribers to sit on large quantities of cash - to the extent of 75% of the total corpus - came in extremely handy in 2014 where we were able deploy it in a market where there were plenty of bargains available.

In fact, it won't be wrong to say that a large part of the success the service has had in beating the Sensex by nearly 2x is because of this luxury of having cash available when the most opportune time to buy stocks presented itself.

Therefore, buying them when the majority of the investors are in panic mode and selling them when the majority has turned greedy, has proven to be a great market beating strategy for Microcap Millionaires.

I have strong reasons to believe this outperformance may continue well into the future as well.

Don't get me wrong. Investing in a low-cost index fund is not bad. It could lead to decent returns over the long term. In fact, much more than what staying in T-bills or FDs could lead to.

However, if you need to beat the markets by a big margin, you need to make full use of the opportunities the stock market keeps throwing up every few years.

And no better way to do this than have a big chunk of your portfolio in cash or cash equivalents.

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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1 Responses to "My Aha! Moment at Saturday's Berkshire AGM"

s.k.limaye

May 8, 2019

9433722046
Nice article.

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