Mint Explainer: Warren Buffett’s record cash reserve and his Japan strategy

“Sometimes I’ve made mistakes in assessing the future economics of a business I’ve purchased for Berkshire – each a case of capital allocation gone wrong. That happens with both judgments about marketable equities – we view these as partial ownership of businesses – and the 100% acquisitions of companies,” he wrote in his letter to shareholders on 22 February.

In this article, Mint delves into two major portfolio moves Buffett has made at Berkshire over the past year: increasing his cash pile and investing in Japanese stocks. Along the way, we have included insights from Rajeev Thakkar, chief investment officer of Parag Parikh Mutual Fund, who has closely studied Buffett’s investment strategies for years.

Why is Buffett holding record cash?

Berkshire’s portfolio can be broadly divided into three buckets:

 – The first bucket has 189 subsidiary companies in which they have full control. It’s difficult to put an exact valuation on these companies since prices are not quoted in the exchange. 

– The second bucket has marketable securities, in other words, stocks of big companies. Berkshire doesn’t control these companies but views them as part ownership through shares. This bucket attracts the most attention. 

– The third basket is cash, which also includes short-term treasury bills. Since Berkshire runs a large insurance business, it said it will always maintain a portion of the portfolio in cash to service claims.

Berkshire has $325 billion in cash and cash equivalents, up from $167 billion in December 2023. For context, this is the highest cash pile Berkshire has ever maintained. As a percentage of assets, the cash and equivalents are also at an all-time high.

This happened mainly because Berkshire trimmed its holdings in listed equities. The value of listed stocks came down from $354 last year to $272 billion now.

Buffett said while their holdings of marketable equities have come down lately, the value of the companies in the first bucket increased somewhat and remains far greater than the value of the marketable portfolio. He said Berkshire will always prefer equity over cash but is impartial whether it’s in the first bucket or the second.

“Berkshire said they will maintain lots of cash in very safe instruments for their insurance business. But even over and above that, the cash has increased a bit, and they have also been selling some amount of US stocks. So, to my mind, it indicates their discomfort with the overall valuation levels,” said Thakkar of PPFAS MF.

“Given that stock prices have been going up quite significantly, and newer ideas have been difficult to come by for them, I think that would account for the increases in cash and some selling they’ve done in stocks,” added Thakkar.

Interestingly, while Berkshire has been paring its stakes in US companies, including Apple, Buffett told investors that it will increase its holdings in Japanese stocks over time. 

Also Read: Mint Quick Edit | Is Warren Buffett’s investment inactivity justified?

What makes Japanese stocks unique?

Buffett follows an interesting strategy for Japanese investments. Berkshire issues yen-denominated bonds and invests the proceeds in Japanese stocks. Bloomberg reported that Berkshire issued ¥281.8 billion ($1.89 billion) worth of bonds in October 2024, making it the largest foreign issuer of yen-denominated bonds for the year.

Buffett started buying Japanese stocks in 2019. He holds shares in Mitsubishi Corp, Itochu Corporation, Mitsui & Co, Sumitomo Corp, and Marubeni Corp. The combined value of these five stocks is $23.5 billion. Berkshire acquired these shares for $13.8 billion. 

It’s worth noting that the dividend income from these stocks far exceeds the interest cost of their yen-denominated bonds. They received $812 million in dividends in 2024 and paid $135 million as interest cost of the yen-denominated bonds.

“It’s a very obvious trade. He has tried to praise the management and said that they are Berkshire kind, but in the letter itself, he mentioned that the dividend exceeds the interest cost from yen borrowings. So basically, it was a clear arbitrage” said Thakkar.

“The shares were trading cheap and the dividend was much more than the cost of borrowing that Berkshire would have in Japan. So not only has he made a positive spread on Japanese equity investment by the dividend income being more than the borrowing cost, but the shares have also gone up in value.”

There’s also no currency risk since borrowings are in yen and investments are also made in yen. Interest and dividends are also in the same currency.

When Berkshire first started buying the Japanese stocks in 2019, he had agreed to keep their holdings below 10%. However, as they are approaching the upper limit, he said that the companies have agreed to moderately relax those limits for Berkshire. 

“Over time, you will likely see Berkshire’s ownership of all five increase somewhat.”

Should you buy Berkshire Hathaway shares?

Thakkar of PPFAS said that the way Berkshire is currently structured, it is not really attractive for investors with small amounts to invest. For PPFAS’s mutual fund portfolio, Thakkar said he could instead buy the shares directly.

“The current Berkshire is a mix of railroad and utilities and that kind of businesses. So these are typically very safe businesses but generally give low returns on capital businesses. These are not the kind of high-return businesses we earlier saw like a See’s Candies or the Moody’s investments that they had,” said Thakkar.

He said investments in Berkshire may make sense for very large funds like university endowments or sovereign funds. For smaller players, unless the prices come down significantly, people can hunt for ideas elsewhere.

Berkshire has two classes of shares, A and B. Class A shares have more voting power than Class B shares. They have recently traded at $718,750 and $478. Residents can invest in foreign stocks through RBI’s liberalised remittance scheme (LRS) limit of $250,000 per year.

From 1964 to 2024, Berkshire has delivered a compound annual growth rate (CAGR) of 19.9%, whereas the S&P 500 has given 10.4%, including dividends.