Warren Buffett is waiting for one last fat pitch.
The Oracle of Omaha released his annual letter to shareholders of Berkshire Hathaway late last month and followed it with a marathon interview on CNBC two days later. As in previous years, investors were eager to hear from Buffett about his succession plans and his assessment of markets, and he didn't disappoint. What we learned is that, for Buffett, the two subjects are closely related.
As my Bloomberg Opinion colleague Tara Lachapelle has already pointed out, Buffett will turn 90 this summer, so succession is top of mind for him and Berkshire's shareholders. Buffett appears to have no doubt that the company will continue to thrive after he's gone. "I want them to look back and say, 'Gee, we should have made this change earlier,'" he told CNBC, adding that he feels "terrific" about Berkshire in the post-Buffett era and that "it's almost going to be embarrassing" how well the company is prepared.
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Which raises the question: Why wait? Buffett has more than earned his retirement after a career that spans more than six decades. One answer is that Buffett is arguably the greatest investor of all time, and the great ones in any endeavour typically don't walk away from the game until they have to. But I suspect the more important reason is that Buffett senses a historic investing opportunity coming, probably the last of his career, and he has no intention of watching from the sidelines.
Buffett has a knack for spotting trouble in financial markets. He's not one for big pronouncements, preferring instead to say he simply doesn't understand the things that concern him. But don't be fooled. He didn't understand internet companies in the 1990s before they roiled the stock market. He was also puzzled by the widespread use of derivatives in the 2000s before they blew up the financial system.
What vexes Buffett today is investors' eagerness to part with their money for shockingly little in return. "It makes no sense to lend money at 1.4 per cent to the US government when it's government policy to have 2 per cent a year inflation," Buffett said. "The government is telling you, 'We're going to give you 1.4 per cent and tax you on it, and on the other hand, we're going to presumably devalue that money at 2 per cent a year.'"
It's not just the government. "We're allowing people to borrow money on much weaker terms than we were five or 10 years ago. You couldn't borrow money at all for a period 10 years ago. I mean, literally, Berkshire couldn't borrow money. Everything stopped. And now the pendulum has swung dramatically and yet we still have very, very, very low rates."
Buffett blames all that cheap money for driving up equity prices, particularly for outright purchases of companies, which he prefers to buying smaller stakes in public companies. "There's quite a premium" for buying whole businesses, according to Buffett, "and part of the premium is because you can borrow so much money so cheaply in buying those businesses. Obviously, you can pay more for a business if you can borrow a very high percentage of the purchase price and of the future cash flow committed to it. And you can borrow at low rates with very little in the way of restrictive covenants or anything of the sort. That's going to bring higher prices, and the demand for that is huge."
That's a problem for Buffett because he cares about price more than anything else. I lost count of the number of times he made that point in his interview. Here's one: "I don't think anybody knows what the market's going to do. I think you do know whether you're making an intelligent purchase at a given price." And another: "A stock can be a good buy or a bad buy. A bond can be a good buy or a bad buy. It depends on price." And yet another: "In the end, if you own good businesses at the right price, you're going to do fine."
Buffett's money is where his mouth is. Roughly 41 per cent of Berkshire's stock portfolio is invested in financials, which is among the cheapest sectors. And nearly a third is in shares of Apple, which Buffett began buying in early 2016 when the stock traded at an average price-to-earnings ratio of just 10.6 during the first quarter of that year, based on 12-month trailing earnings per share, nearly half the S&P 500's average P/E ratio of 19.5 at the time.
And let's not forget the whopping US$128 billion of cash Buffett is hoarding at Berkshire. It's not that he enjoys having all that cash around; Buffett's reason for being is to buy companies. "I've actually been a personal net buyer of stocks ever since I was 11," Buffett recalled. "We're about 80 per cent roughly in equities and about 20 per cent in cash, and I'd rather have that 20 per cent in other good businesses."
So how will it all shake out? "People are reaching for yield, there's no question about that, and that's stupid, and it has consequences over time," Buffett explained, adding that, "It can take a lot longer than you think, but eventually you get to midnight and everything turns to pumpkins and mice." In other words, when the money dries up or interest rates return to more normal levels — for Buffett, a question of when, not if — equity prices will tumble and he will have his opening.
Like all great players, there are few flaws in Buffett's game. But perhaps more than anything else, Buffett will be remembered as the master of the fat pitch, and he's fixing for one more before he hangs up his stock charts.
- Nir Kaissar is a Bloomberg Opinion columnist covering the markets.