Buffett & Munger Compare Holding Cash vs. Investing In S&P Index

From the 2019 Berkshire Hathaway annual meeting, Warren Buffett and Charlie Munger compare holding cash versus investing in S&P Index.

Investing In S&P Index

Buffett & Munger Compare Holding Cash vs. Investing In S&P Index

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Transcript

Warren you are a big advocate of index investing. And not trying to time the market. But by your having a picture hold such a large amount of cash in t bills. It seems to me you don't practice what you preach. I'm thinking that their alternative would be for you to invest most of Berkshire's excess cash in a well diversified index fund. Until you find an attractive acquisition or buyback stock. Had you done that over the past 15 years all the time keeping the 20 billion dollar cash cushion you want. I estimate that at the end of 2018 the company is one hundred and twelve. The imbalance in cash cash equivalents and short term investments and t bills. Would have instead been worth about one hundred and fifty five billion. The difference between the two figures is an opportunity costs equal to more than 2 percent of Berkshire's current book value. What is your response to what I say. And for I forgot to say that the question is from Mike al-Zahar who is with the colony group located in Boca Raton Florida.

It's a perfectly decent question and I wouldn't quarrel with the numbers and I would say that that is an alternative. For example that my successor. May wish to employ because on balance I would rather own an index fund than than than carry Treasury bills. I would I would say that if we didn't do that that policy. In 2000 seven or eight we would have been in a different position in terms of our ability to move. Late in 2008 or 2009 though it has certain.

It has certain execution problems with hundreds of billions of dollars than it does. If you were having a similar policy with a billion or two billionaires I'm sorry but it's a perfect. It's perfectly rational observation and certainly looking back on 10 years of a bull market that if it really jumps out at you. But I would argue that if you're in smaller numbers that. It would make a lot of sense. And if you're working with large numbers it. It might well make sense that the future at Berkshire to operate that way. We committed 10 billion a week ago and there are conditions under which.

They're not. They're not remote. They're not likely in any given week or a month or a year. But but there are conditions under which we could spend 100 billion dollars very very quickly.

And if we did that those conditions existed it would be the capital very well deployed and much better than in an index fund.

And so we've been we're operating on the basis that we will get chances to deploy capital and they will come in clumps in all likelihood and they will come when other people don't want allocate capital. Charlie what do you think about him.

Well I plead guilty to being a little more conservative with the cash than other people and but I think that's all right. We get to here all the money and. A lot of securities that would have done better than the S&P with 20 20 hindsight. Memory had all that extra cash all what period. If somebody along the way of opportunities and so on. I don't say it's a send. Be a little strong on cash when you're as big a company as we are. We don't have to. I watched Harvard use the last ounce of their cash including all our prepaid tuition from the parents and plunged into the market at exactly the wrong moment it may go forward commitments to private equity. They suffered like two or three years of absolute agony. We don't want to be like Harvard does timber and a whole bunch of money plus timber and I mean yeah yeah well we're not going to change said.

We we do like having a lot of money to be able to operate very fast and very big and we don't. And maybe we won't. We know we won't get those opportunities frequently. I don't think. It's certainly you know in the next you know in the next. 20 or 30 years I'll be at two or three times when it'll be raining gold and I have those God side but we don't know when they will happen. And and we have a lot of money to commit. And I would say that if you told me I had the either charity short term Treasury bills or have index funds and just let that money be invested in American generally I would take the index funds. But we still have hopes and the one thing you should very definitely understand about Berkshire. Is that.

We run the business in a way that we think is consistent with serving shareholders who have virtually all of their net worth in Berkshire.

I happen to be in that position myself but I would do it that way under any circumstances we have a lot of people who trust us who who really have disproportionate amounts of Berkshire compared to their net worth. If you were to follow standard investment procedures and and we want to make money for everybody but we want to make very very sure that we don't lose permanently money from anybody for anybody that buys our stock. Somewhere around intrinsic business value to begin with we we just have enough. We have an aversion. To having a million plus shareholders maybe as many as two million and having a lot of them. Ever really lose money if they're willing to stay with us for a while and we know how people.

Behave when when the world generally is is upset and they want to be with something I think they want to be with something that they feel is like the Rock of Gibraltar. And we have a we have a dispute. We have a real disposition toward that group.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver