Having $100 billion in leftover cash is never a bad thing... unless you happen to be the richest investor in the history of the world.
At last weekend's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) shareholder meeting - or Warren Buffett cult gathering, as I consider it - the Oracle of Omaha revealed that, even after buying 75 million more shares of Apple Inc. (Nasdaq: AAPL), he still has over $100 billion left in cash.
That's about 20% of the total value of Berkshire, so it's a bit of a problem for him.
As he explained to CNBC on Monday, there's a lot of competition among private equity funds and other financial buyers for companies big enough to move the needle at Berkshire.
That's not easy to do.
At the same time, neither is buying; prices are just not that attractive right now, and when it comes to spending Berkshire's money, Buffett is notoriously selective.
He said, "I look at prices and I find it hard to buy things. And incidentally, professional investors aren't going to do better than the average amateur in almost all cases. But I don't find things easily. I mean, we were on and, in March of 2009, when the S&P was in the 660s or 670s, we talked about it then. I mean, this was the bargain counter. And it continued for a long time. Stocks have been very, very cheap."
(Note the use of "have been very, very cheap," and not "are very, very cheap.")
While he agonizes over how to spend money, Buffett's often-repeated solution - his classic misdirection, really - for regular investors has always been that they should just buy "low-cost" index funds because, hey, "99% of the population shouldn't even try" to beat the market.
Publicly, he comes across as a huge fan of indexing, saying, "the best single thing you could have done on March 11, 1942 - when I bought my first stock - was buy an index fund," because "$10,000 invested [there] in 1942 would be worth $51 million today."
Now, his math is right, of course, but there are so many things wrong with this idea I don't even know where to start.
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Do you have 70-odd years to wait around for $51 million? Do you have a time machine that will allow you travel back in time and quite literally do as the man suggests?
Me neither.
Naturally, the horde of "Buffettologists" out there, who slavishly hang on his every word and attempt to imitate the man's every move, go out and try and buy time machines set for March 11, 1942.
And failing that, they go and load up on index funds (while BlackRock laughs all the way to the bank), because they think that's what Warren Buffett does.
Obviously, he does nothing of the sort.
So let's let the Buffettologists go shop for magic time machines and throw good money after bad on expensive index funds - maybe we'll check back in with them in 2094 and see how they did, though I doubt they'll be sitting on anywhere near $51 million.
Instead of trying (and failing at) what Warren Buffett and Charlie Munger do now that they are rich...
...we'll do what they did to get rich - and we'll succeed with flying colors, starting with this one "boring" company...
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Buffett Built His Wealth Just Like This
I've mentioned this before, and it may come as a shock, but just like I don't have 76 years left, and just like I don't have a real time machine, I don't have $100 billion.
And unless Warren Buffett is a secret admirer of mine who reads my articles, I imagine most of you reading this don't have $100 billion either.
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What I do have is a ferociously hard-won pile that's big enough to get the job done, but not big enough to require an SEC filing every time I buy enough of a company to make a meaningful difference in my portfolio.
So... more like Warren Buffett: 1942 Edition - the same one who would grow to become the world's most successful investor by buying deeply undervalued companies and special situations.
Both Buffett and Munger have even admitted that, if they were running with a smaller amount of money, they would go right back to that exact same strategy. This would earn them much higher returns than they could produce with the leviathan that is Berkshire Hathaway.
Young Buffett, in particular, loved small insurance companies that could be bought at unreasonably low prices, and so do I.
When it comes to making money from insurance companies, the math works out a lot like running a sports book: Customers are betting that something bad will happen to them, while I'm betting that it won't.
If I don't like the risk level of my book, I can balance it out using the miracle of reinsurance to make sure the odds are how they are in the "Hunger Games:" ever in my favor.
One of my favorite small insurance companies right now is 1347 Property Insurance Holdings Inc. (Nasdaq: PIH). It sells wind and hail insurance to Texas and Louisiana residents and even just started writing new policies down here in Florida.
Now, the fact that all three states get hammered by tropical storms and hurricanes every year may make 1347 sound like an awful investment. The devastation and destruction can, and sometimes does, scare insurance stocks into a frenzied sell-off.
However, using reinsurance and smart underwriting, 1347 CEO Doug Raucy and his team have set up a strong business that still breaks even during bad years.
Just last year, when Hurricanes Harvey and Irma rocked Texas and Florida, 1347 still squeezed out an annual profit of $0.05 per share. That was up from zero cents per share the year before.
The best part is, the stock is currently trading at just 86% of book value, meaning it's definitely on sale. It's even possible that it just keeps growing book value rapidly forever; that would be mighty profitable for shareholders, especially those who bought the stock at an unreasonably cheap price.
But for a company like this, I think either one of these two scenarios could play out: The book value rises following a great year, or the company gets bought out.
Either event would be wildly profitable for shareholders brave enough to embrace what the mainstream would call a "boring" investment.
But then again, Warren Buffett made these boring investments as a young man, and look at where he is today.
His strategies now, as well as the fact that he doesn't know how to spend his $100 billion, don't matter to us investors without billions of dollars at our disposal.
What matters to us is the strategies that made him rich in the first place.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.