Warren Buffett on Saturday lamented the few attractive investments available to his sprawling $ 713bn Berkshire Hathaway conglomerate, warning that low interest rates over the past two years had inflated valuations across financial markets.
The musings, in Buffett’s long-anticipated annual letter, accompanied results that showed Berkshire’s operating profits had soared 45 per cent from a year before to $ 7.3bn in the final three months of the year. The gains were propelled by strong results from its BNSF Railway and the string of electric utilities it owns.
Buffett, 91, told Berkshire investors that both he and his longtime right-hand man Charlie Munger had found “little that excites us” as they sought out investments with which to plow some of the group’s gargantuan $ 146.7bn cash pile into.
“Charlie and I have endured similar cash-heavy positions from time to time in the past,” he said. “These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital. ”
Buffett, who has been criticized for not using more of the company’s available cash to buy up companies to add to its portfolio, has instead turned heavily to buying back Berkshire stock. The company spent $ 27.1bn on share repurchases last year, and Buffett noted in his letter that it had already bought a further $ 1.2bn of Berkshire stock in 2022.
The view from the doyen of the investment industry comes after a turbulent three months in financial markets, with investors dumping the shares of lossmaking companies as they race out of riskier corners of the stock market.
“Speaking less politely, I would say that bull markets breed bloviated bull,” Buffett said, before trailing off.
The moves have been spurred largely by a shift from the Federal Reserve, which is readying to raise interest rates for the first time since 2018 as it works to tame inflation and curb excesses it sees in markets.
“Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever,” Buffett wrote. “Other factors influence valuations as well, but interest rates will always be important.”
Conditions in the market have started to favor old-line industrial conglomerates, financial behemoths, energy giants and utilities – all Berkshire business lines. The company’s stock has advanced 6.4 per cent so far this year, far ahead of the 8 per cent slide by the S&P 500.
Many of the excesses that Buffett and Munger have warned about in recent years have started to seep out of the market. The average company in the Russell 3000, which captures both large and small businesses, is down more than 30 per cent from their 52-week highs, Financial Times calculations show.
Data from Finra, Wall Street’s watchdog, also signal that some of the speculation that dominated trading activity in 2021 has been washed out. The amount of borrowed money being used to fund stock positions has dropped by more than a tenth since October.
“People who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises,” Buffett said.