Berkshire Hathaway has gotten really expensive by buying value stocks and hoarding cash
There are two ways* to get rich buying value stocks:
Buying undervalued shares of companies and waiting patiently for them to converge upward to your estimate of fair value;
Running a publicly traded company buying what you think are undervalued shares of companies, sitting on a ton of cash, and having investors push your stock to its highest valuation since 2008.
Over the course of its history, Warren Buffett’s Berkshire Hathaway has done a lot of No. 1, but lately it’s been enjoying No. 2.
Berkshire ended February at its highest monthly forward price-to-book ratio since 2008.
Book value is the value of a company’s assets relative to its liabilities. Granted, this metric, while elevated compared to its own history, is still at a large discount to the broad market dominated by the ascendance of relatively asset-light companies.
Around 30% of Berkshire’s assets are in cash and short-term Treasury holdings. As such, investors seem to be ascribing a fairly high value to what Warren Buffett, successor-in-waiting Greg Abel, and other deputies will be able to do with that cash, or are merely seeking solace in its size and the built-in defensiveness of that cash pile.
One thing they haven’t been doing with that cash lately: buying back their own shares. Berkshire has stamped out share repurchases even more than JPMorgan’s Jamie Dimon lately, with a grand total of $0 spent on buybacks in each of the past two quarters.
*There is a No. 3: being a hedge fund manager who buys value stocks, underperforms, but still rakes in the dough from management fees.
