Warren Buffett knows that with just a few smart investments, you can generate huge returns that outperform the market.
He told shareholders that over the approximately 58 years he has been in business, berkshire hathaway (NYSE: BRK.A) (NYSE: BRK.B), only 6 to 12 decisions have impacted their success as a business. The real secret: “We only swing at pitches we like,” he says, a baseball metaphor he’s been using for more than 25 years.
There hasn’t been much pitching about Buffett’s sweet spot lately. Berkshire’s stock sales exceeded its purchases in each of the past six quarters. But there’s one big holding that Buffett expects to continue adding to in the second quarter that investors can’t ignore.
Another $11 billion invested in Berkshire’s largest stocks
most investors know that apple (NASDAQ:AAPL) remains Berkshire’s largest stock holding. It remains Mr. Buffett’s biggest bet on the stock market, even though he sold some of the company’s stock for tax purposes in the past two quarters. Oracle of Omaha expects this situation to continue for the foreseeable future.
But Berkshire’s cash and cash equivalents position far exceeds the value of Apple stock. The position reached $189 billion by the end of the first quarter. And Berkshire invests most of its cash in Treasury bills.
Short-term U.S. Treasuries are Buffett’s preferred place to store cash because they offer safety and liquidity. In today’s market, these give him two benefits and favorable interest rates. At the time of writing, the three-month US Treasury yield was approximately 5.4%.
So Buffett has no problem stockpiling cash and investing it in U.S. Treasuries. “A reasonable assumption is that Berkshire’s holdings in U.S. Treasuries will probably be around $200 billion at the end of the quarter,” Buffett said. He said that even if yields were to fall significantly, he would still be holding a lot of cash (but without telling the Fed).
“I would be happy to use it,” he told shareholders. “But we don’t spend money unless we think there’s little risk and we can make a lot of money.”
There are very few such opportunities. As Buffett points out, during his 58-year tenure, he has only made a few major decisions that changed Berkshire’s direction. And as Berkshire grows, that opportunity shrinks. Because “a lot of money” now means tens of billions of dollars, not tens of millions. There are currently limited investment opportunities that can change the situation.
Should investors follow Buffett’s lead?
Buffett’s recent stock sales and growing cash pile may send a message to many investors that they should save cash, too. Also, with interest rates the way they are, cash won’t completely choke off earnings as it has in the past. Still, I don’t think Mr. Buffett would recommend that most investors manage their portfolios the way Berkshire manages their portfolios.
He believes retail investors have a huge advantage over large institutional investors like Berkshire Hathaway. “For $10 million, I think me and Charlie could get a good return, because very little happens with very small investments,” he said of his late partner Charlie Munger. Ta. Considering most retail investors manage much less than $10 million, there’s still an opportunity to outperform the broader market.
For individual investors, being able to move in and out of small-cap stocks without significantly impacting market prices is a big advantage. In fact, small-cap stocks are currently undervalued relative to historical levels, while large-cap stocks are overvalued, and mega-cap stocks may be even more overvalued.
The small-cap segment of the market can present a unique investment opportunity for individuals, but it’s not an area Berkshire Hathaway can play in.
Even if you’re an investor who prefers the stability of large-cap stocks, follow Buffett’s top recommendations. S&P500 Index funds aren’t a bad idea right now either.
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Adam Levy holds a position at Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett expects to add at least $11 billion to this investment in the second quarter Originally published by The Motley Fool
