Warren Buffett has rules for his Berkshire Hathaway Inc. (NYSE:BRK.A,NYSE:BRK.B). One of those rules is that, instead of paying dividends, the company reinvests its cash. And, once again, cash is piling up.
By the end of June, BRK.B stock had $72.679 billion of cash on its books. Since the company generates $1.5 billion in new cash each month, he could have as much as $77 billion in cash by the time the company reports earnings again Nov. 4.
Cash is not a good investment. It depreciates with inflation, and bonds pay almost nothing. Berkshire last disgorged cash in January, buying Precision Castparts for $32.36 billion.
The bottom line is that BRK.B stock once again has a lot of money it needs to put to work. So what should it do?
BRK.B: Big Are Investments Hard to Find
Buffett began a half-century ago by simply investing in stocks that met his criteria, undervalued companies with enduring competitive advantage. As Berkshire grew, he began buying whole companies.
Given Buffett’s desire to keep a cushion of $20 billion on-hand, in case a disaster like Hurricane Matthew forces his insurance companies to make a big pay-out, he could be looking for a company worth nearly $60 billion to add to the corporate jewel collection.
But there just aren’t many jewels available at that price. Hershey Co (NYSE:HSY), for example, might be a nice fit, but it’s worth just $20.25 billion. DISH Network Corp (NASDAQ:DISH) is worth just $25 billion. Twenty-First Century Fox Inc (NASDAQ:FOXA) is worth just $46.7 billion. Netflix, Inc. (NASDAQ:NFLX) is worth just $42.5 billion.
Add to this the fact that Buffett wants to understand the businesses he buys, and he has admitted in the past that he doesn’t understand technology.
BRK.B’s large investment in International Business Machines Corp. (NYSE:IBM), despite his defense of it, is a cautionary tale in that regard. He bought into the company in 2011, and it’s down 15% over the last five years. He probably should have bought his friend Bill Gates’ company, Microsoft Corporation (NASDAQ:MSFT). It is up nearly 120% in that time.
Why Buffett Likes the Boys From Brazil
This brings us back to 3G Capital, the Brazilian investment firm through which he has acquired fat stakes in Kraft Heinz Foods Co (NYSE:HNZ), Restaurant Brands International Inc (NYSE:QSR, as well as Anheuser Busch Inbev SA (ADR) (NYSE:BUD).
3G and BRK.B use the same investment criteria. They look for undervalued operating companies. The difference is that 3G also has an operating philosophy, a zero-based budgeting approach that aims to lower costs and increase margins steadily, and it works.
Thanks to 3G Capital, Buffett can now shop the world, and find good operators for the resulting holdings. The value of BUD has nearly doubled under 3G’s management. HNZ is up nearly 40% since returning to the public market in 2011. QSR, which holds Tim Horton’s and Burger King, is up 42% just since December of 2014.
Buying and holding any of these stocks, which are controlled by 3G and BRK.B, is a great investment strategy. Getting in on whatever they do next may well be Buffett’s strategy.
What Buffett Has Missed With BRK.B Stock
Of course, by focusing on easily understood production opportunities, and avoiding technology, Buffett and 3G have missed the biggest investment opportunities of this decade. It’s true that the value of BRK.B stock has doubled in the last five years. But the S&P 500 is up nearly 85%. Buffett could have done nearly as well as he has by throwing darts at a stock chart.
Meanwhile, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is up 205%, and is now up 50% more than Berkshire. The market cap of Amazon.com, Inc. (NASDAQ:AMZN) has zoomed past that of BRK.B, up 270%. Facebook Inc (NASDAQ:FB) went public in 2012, and is now worth more than Berkshire.
If you want to become Warren Buffett, rather than just follow him, my advice is learn technology investing.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not own a position in any of the aforementioned securities.
