The Buffett Effect
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Pre-Read: This is an opinion-based article. None of the content below is financial advice. Everything read is purely entertainment. You do what you want to do, with your own money.
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Every quarter those who are known as ‘super-investors’ are required to file what they are doing in the market for the previous quarter. This form is called a “13-F” and displays these super-investors holdings, what they are buying, and what they are selling. Enabling us to gain insight into what the best in the business are doing. One of the most notable investors is of course, Warren Buffett. Who has outperformed the market’s standard benchmark, the S&P500 substantially since Buffett’s inception in 1965. He has brought a considerable compound annual growth rate (CAGR) of 19.8% from the full year 1965 to full year 2023. With 2024 being no different as Berkshire Hathaway ($BRK.A/$BRK.B) has gained 31.31% as of December 4th, 2024.
As I am one who enjoys taking a look into what these top investors are doing; there has been a looming question around the man who has been the face of the market for decades. What is Warren Buffett planning to do with his giant cash position?
Before we dive into the numbers. I would like to bring up one of my favorite life theories: The Butterfly Effect. This theory can be defined as “if a butterfly flaps its wings in one part of the world, that it might set off a chain of events that eventually causes a hurricane in another part of the world.”
Bringing me to come up with my own chaos theory for markets; The Buffett Effect. This effect goes like “if Warren Buffett is buying or selling a security it causes investors around the world to go into deep self-reflection as to what they should do with their portfolio to match the one who has dominated the space for decades on end.” When money managers find what Buffett is doing some of them blow up their account trying to match his exuberant historical performance. Trying to figure out what and why he is doing what he is doing.?
The new “Buffett theory” can be exercised in today’s market with his recent 13F filing. With his most notable new disclosures in Domino’s Pizza, Inc. ($DPZ) and Pool Corporation ($POOL). He also sold 96.49% of his recently acquired Ulta Beauty, Inc. shares ($ULTA) from the quarter prior. These 3 companies have seen major moves since then of course, with the companies bought being better than the company sold. Domino’s saw a 6.9% pop to the upside and Pool Corp. gained 5.7%. in after-market hours. With Ulta Beauty seeing a 11.5% decline over the following 8 days, eventually recovering.
Now that we can see the power his disclosures can bring. We must come back down to earth, however, and must acknowledge Buffett isn’t the all-knowing market controller. He may have great returns but he, just like anyone else, doesn’t know if the market is going to go up or down. Over the long term the market always finds a way to trend up. What we do know is Buffett is a very cautious man and very stingy with his cash especially when dealing with large sums of money managed. In previous conference calls he has brought up that ‘small sums of money are easier than large sums due to the downside being much greater.’ The other lesson is the age-old quote stating that “be fearful when others are greedy and greedy when others are fearful.” A principle he invests by. Currently the market is experiencing high levels of greed and confidence and not much fear. So, by him storing $325 billion in cash (up $48 billion from the previous quarter) it isn’t too out of the ordinary for the Oracle of Omaha. It is important to note that this is the most cash he has ever stored.
To have fun with this topic we can only speculate what is inside of the current CEO of Berkshire Hathaway’s head. He is notorious for buying out companies he loves in full and absorbing them into Berkshire. The first company that comes to mind is the oil and gas giant Occidental Petroleum Corporation ($OXY). He has been a net buyer of $OXY the past few quarters and currently has a 4.94% weighting in Berkshires portfolio. As a Berkshire Hathaway B share owner - I wouldn’t mind. I'd like this idea. They already own Berkshire Hathaway Energy. This would only help secure a top position in an industry that is not going anywhere anytime soon. Mind you this is all speculation and good fun. He has not come out or said anything hinting to this idea. Berkshire is a trillion-dollar market cap company with a large percentage of that into insurance companies. So, another theory would be storing excess money in case of large sums of filings, protecting their ability to pay out those claims.
Back to a huge thinking point is Buffett has stored large amounts of cash right before big downtrends in the market. And he may be using his famous indicator as a current reference. Seeing as he already has his own indicator, The Buffett Indicator. This is calculated by dividing Americas market cap by GDP. Which sits today at around 200%. Around 60% higher above historical trends. Not an attractive offer when trying to maintain the near 20% CAGR.
So, who truly knows what is going to happen with the $325 billion in cash. Buffett grants plenty of years of wisdom which would take someone a lifetime to fully dissect. I recently came across a lecture he gave some time ago during a Berkshire Hathaway annual meeting. Noting “you really should not make decisions in securities based on what other people think. If you’re doing that you should think about doing something else.” Everybody has different investing philosophies and timelines. You and I being no different. Invest in a way that you can understand and dedicate yourself to. Preparing yourself for whatever could happen and sticking to a timeline reasonable to your financial needs. I think we should take Buffett's own advice and not follow what exactly he is always doing, because we don't really know.
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