Warren Buffett has been very busy selling shares and switching to cash, indicating that he thinks the sharemarket is at “peak greed”.
I was interested to read this week that Berkshire Hathaway has been selling shares over the last year when the markets have been on their record breaking run and switching to cash. It’s the first time Buffet’s done this since 2008.
The company ended up selling almost $US2 billion ($2.7 billion) more in stocks than it purchased during the period, adding to a cash pile that has climbed to a record $US149.2 billion.
“I always say you should get greedy when others are fearful and fearful when others are greedy,” is one of Buffett’s great investment pearls of wisdom. Think about it, this is one of those little investment gems to live your life by and very appropriate at this stage of the investment cycle.
By selling shares and switching to cash, Buffett is basically indicating the sharemarket is at “peak greed” and he’s fearful of share valuations at these levels. He doesn’t think it will last, there will be a big fall in markets, so he’s stockpiling cash to buy back in when the crash comes.
It is just one investor’s view, but he’s a pretty good one. And this chart shows he may have a point.
Buffet’s decision making process
Buffett’s sharemarket decision making is based on four fairly fundamental questions he always asks himself before buying a stock.
1. Do I understand the business?
How many times have you invested in a company which you didn’t quite know what it produced, mined or provided? Warren Buffet only invests in companies where it’s clear exactly what they do.
2. Is it run by people I admire and trust?
Leading the company is a board and executive team. They set the culture for the rest of the workforce, make the decisions and guide the business. So often it’s the quality of that board and that executive team which underpins success or failure.
3. Does it have a sustainable competitive advantage?
Standout investment returns are produced by standout companies which have a standout advantage over competitors. In today’s business and investment environment, it’s that edge over competitors which translates into success.
4. Is it the right price?
We’re talking money here. The best company in the country can be a bad investment if its price is unrealistically high, as investors bid up the value to unsustainable levels. Warren Buffet’s patience is a key plank to his success. So, he’ll identify a good stock and then patiently wait until its price realigns to a sensible level.
If yes to all the above, then do the deal.
In the end it’s all about sticking to quality and spreading your investments over a range of companies on the right track.