Did you know that Warren Buffett recently reported that his Berkshire Hathaway conglomerate is sitting on $100 billion in accumulated cash?
The word “awesome” is often overused. But Buffett’s cash pile is truly awesome.
The pile of readies is equivalent to nearly a-third of Singapore’s annual economic output. It is more than the Gross Domestic Product (GDP) of Myanmar, Laos and Cambodia combined, for an entire year.
And unless Buffett can find a way to spend the money, the pile could grow even larger.
A nice problem
But Buffett doesn’t exactly want to sit on the cash. He would much rather put it to good use. However, he can’t find anything suitable to buy, just yet.
In his case, there is probably nothing out there big enough for him to buy. With the cash, he could acquire Singapore’s three listed banks, and still have money left over to buy a couple of property companies.
But once Buffett finds something worth buying, he is likely to move big and move quickly.
One of the key features of Berkshire Hathaway’s strategy has been to continually grow its portfolio of long-term investments.
In other words, Buffett has regularly added to his portfolio, when the opportunities have arisen. As he grows the size of his assets, so too has the income produced by those investments.
Cash is King
But investing is not without risk…..
…..Buffett once said: “Writing a cheque separates conviction from conversation”. So the simple act of making a conscious investment should always be taken seriously.
In essence, it means that we are moving from a safe asset, such as cash, to something less predictable, such as shares.
Many of us like to think that cash is safe, while shares are risky. That is the way our brains are programmed….
…. Cash, which we can see and feel and put under our mattresses, is perceived to be safe. Shares, which can go up and down like a yo-yo, are risky.
However, Buffett thinks of cash completely differently.
He once said that holding onto cash, which pays just 1% interest, was tantamount to buying a stock with a valuation of 100 times earnings.
Not many of us, I suspect, would ever consider paying $100 for a stock that generates just $1 in profit. But that is precisely what we are doing when we sit on cash.
Cash is risky
There is something else to consider. Many of us think of risk as being a loss of capital. Put another way, we are worried that an investment in the stock market could be worth less tomorrow than today.
That is possible. The market can be unpredictable in the short term. So, there is a chance that our shares could fall in value, right after we have bought them.
But what if I told you that cash in the bank is losing its value all the time.
At 2% inflation, $100 today would only have the buying power of $98 after one year. In 36 years’ time, it will only have half its buying power…..
….And that is provided the rate of inflation stays at 2%. Chances are inflation could pick up more aggressively than we think.
Act now
If we want to preserve the purchasing power of money long into the future, we should consider moving our cash into inflation-beating investments.
We need to look for companies that have pricing power. They should have high returns on equity. They should be able to generate cash.
These companies exists right here in the Singapore market. If we buy correctly, we could one day be faced with the same question that Warren Buffett is facing, namely, what can I spend my money on now?
Source MotleyFool
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