What Will Warren Buffett Do With $112 Billion in Cash?

Warren Buffett recently released his latest letter to Berkshire Hathaway (BRK.A -0.29%) (BRK.B -0.10%) shareholders and addressed the company's growing cash hoard. In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what Buffett said about Berkshire's potential uses for its cash and what investors need to know about it.

A full transcript follows the video.

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This video was recorded on Feb. 25, 2019.

Jason Moser: I have an idea of what you were doing Saturday morning. Now, granted, I'm in Virginia, you're in South Carolina. But I bet you we were doing the same thing. Were you reading Buffett's letter Saturday morning?

Matt Frankel: I was, and I was writing about it. I tell you, my wife loves these two weekends a year when something significant happens with Berkshire, because it always happens on a Saturday, so I always have to leave the kids with my wife and read what old Uncle Warren has to say.

Moser: [laughs] Your kids eventually will be old enough where you can just let them sleep in, and you can just wake up early. That's basically what I did. The kids were still sleeping in my house, I just woke up, had some coffee, sat there, and read the letter. It was a peaceful time to do it.

All sorts of opinions, all sorts of little nice saws to pull out of his letters every year. What stood out to you in this year's letter?

Frankel: The fact that they're still having trouble making a big acquisition. The biggest question on my mind going into the letter -- let me back up. The biggest question on my mind going into reading what Warren Buffett did with his stock portfolio this quarter was, "The market was tanking in the fourth quarter. He must have been on a buying spree." Well, it turns out, he wasn't.

Moser: Yeah, what's the deal with that? I was!

Frankel: Yeah, that's the question. I was hoping he would have spent $50 billion in the stock market during the fourth quarter, but that didn't happen. He was actually barely a net buyer of stocks.

Moser: Killing me.

Frankel: He keeps mentioning how valuations are just insane when it comes to acquisitions. He mentioned this in his letter. On CNBC this morning, he said Berkshire was very close to making a really large acquisition in the fourth quarter. I'm curious as to what it is. He won't tell.

Moser: I was going to say, what was that, Matt? What was it?

Frankel: I know! I'm wondering what it could possibly be. He said it was a big acquisition, even by Berkshire standards. In his letter, he said that stocks were still the best way to put money to work. Now that we see that Berkshire was trying to make a big acquisition, they were probably holding cash back for that, that's my big takeaway as to why we didn't see more stock-buying activity. He also said going forward in 2019 to expect the same. He said valuations remain -- not his words, but what he's trying to say is valuations are kind of ridiculous right now when it comes to what companies want to be bought out. So expect stocks to be the best driver of value going forward. That's what Berkshire wants to put its money into.

It's also worth noting that Berkshire did buy back a little bit of its own stock this quarter. Not a ton. Warren Buffett says that over time, he expects these to continue. In fact, Berkshire's dropping book value as Buffett's preferred bench performance benchmark, and the buybacks was one big reason. He said not only do Berkshire's businesses distort the book value over the years, but the buybacks, as he buys back shares at a premium to book value -- you're not going to find Berkshire for less than book value -- as he buys shares for greater than book value, it's going to further distort the company's price-to-book ratio. So, they're scrapping book value altogether. I take that as a positive sign that Buffett expects future buybacks, because he can only buy back stock when him and Charlie Munger agree that it's a good deal. It seems like he still thinks that.

Moser: Everything you said, I agree with totally. I thought it was interesting to hear him harp a little bit on that $20 billion cash position. He wasn't going to breach that. He always wanted to make sure that they were never caught needing cash for any reason. We always get that question from listeners. "How much cash should I keep in my portfolio at any given time?" That's always a debate. Everybody's got their own opinion on that, and what they do. But it was an interesting perspective there. I encourage folks to go read that letter and read that part about what he said in regard to keeping cash in his balance sheet.

The other thing that he was talking about that -- I was a little bit giddy when I was reading this, Matt, I'm not going to lie. I'm not a Berkshire shareholder anymore. I sold those shares a little while back because I felt like, to me, there was more opportunity in Markel, given the size of Markel vs. the size of Berkshire. It was less about Berkshire and more about the opportunity with Markel. But he was gushing about their wholly owned businesses being that most valuable grove in the Berkshire model. I get excited about that because I see Markel doing the same kind of thing with their venture side of their business. And they're just getting started there. That Markel venture side of the business now brought in $2 billion in revenue over the past year. We've seen a lot of growth there. I do think that they are trying to build that side of the business out very much the way that Charlie and Warren have built out Berkshire Hathaway. Made me think a little bit of the position of Markel, and how happy I am to be an owner of those shares.

Frankel: I don't disagree with you. I own both. I think Berkshire still has market-beating potential, but it's nothing that's going to really excite you. It's not going to return 20% a year for the next two decades. But Markel certainly could. Not that it will, but it could.

Moser: It could.

Frankel: It's not possible with Berkshire.

Moser: Yeah. Certainly, we recommend anyone listening go to the Berkshire Hathaway website there, click on that annual letters tab and read the most recent letter. There's always something in there that makes you see a new angle. That's why we read them. They're always really enjoyable.