Throughout history, few investors have been more successful than Berkshire Hathaway (BRK.A 0.35%) (BRK.B 0.40%) CEO Warren Buffett. Since 1965, Berkshire Hathaway's stock has averaged an annual gain of 20.3% for shareholders. That's more than double the 10% total return, inclusive of dividends, that the S&P 500 has averaged over this same period. Over 55 years, this works out to a 19,784% gain for the S&P 500, and a 2,744,062% for Berkshire Hathaway stock.
Game, set, match: Buffett.
Yet the Oracle of Omaha hasn't behaved like his usual opportunistic self over the past 4 1/2 years. Since his company acquired Precision Castparts in early 2016 for $32 billion, Buffett and his investing lieutenants Todd Combs and Ted Weschler haven't been doing a lot of buying. At the beginning of the third quarter, Berkshire Hathaway's cash pile stood at an all-time record $147 billion.
It begs the question: Why isn't Buffett putting more of his cash to work?
Buffett doesn't see any real value
Warren Buffett is a big-time cheerleader for the U.S. economy, but that doesn't mean you'll see the Oracle of Omaha willingly chase equities with frothy premiums.
Buffett has made a name for himself as a value investor with a knack for finding businesses that offer sustainable competitive advantages. But it's his stick-to-itiveness about paying fair prices for great companies that's really kept him from taking undue risk.
As of this past weekend, the Shiller price-to-earnings ratio stood at nearly 31. The Shiller P/E is based on average inflation-adjusted earnings from the previous 10 years. Even with elevated valuations over the past decade, this marks only the fourth time in history that equities have spent a considerable amount of time above a Shiller P/E ratio of 30. The previous three times resulted in some fairly sharp sell-offs for the market.
While I doubt Buffett keeps regular tabs on the Shiller P/E ratio, it's pretty evident from his trading activity since early 2016 that he's not thrilled with stock valuations.
The elephant is proving elusive
Secondly, Warren Buffett has previously noted that he's not looking to put small amounts of Berkshire Hathaway's capital to work at a time. Instead, Buffett is looking for an elephant-sized acquisition that'll really move the needle for his company. However, this elephant-sized deal hasn't materialized.
It's tough to say what Buffett and his team might be looking at as an acquisition, but the company has long favored brand-name companies at fair prices. Back in February 2018, I opined that electric utility stock NextEra Energy (NEE 0.49%) offered the intangibles that the Oracle of Omaha was looking for in a company. NextEra is the largest public utility in the U.S. by market cap, and is unrivaled in solar and wind energy capacity. By focusing on renewable energy sources early, NextEra Energy has put itself at the front of the innovative curve in the utility sector. This is also why its compound annual earnings growth remains in the high single digits in an otherwise slow-growing sector.
I suspect that an elephant-sized deal for Buffett would have to come from the utilities sector, or perhaps something in consumer staples that he's familiar with. Ultimately, it's Buffett's call when or if a big purchase is to be made.
The Oracle of Omaha has been ceding some control to his lieutenants
Consider too that Warren Buffett is almost certainly ceding some of his investment duties to Combs and Weschler as he ages. With the Oracle of Omaha celebrating his 90th birthday recently, he simply may not have the desire or energy to stay on top of the market like he once did.
While Combs and Weschler are free to invest a portion of Berkshire's cash as they see fit, they don't have the green light to make major purchases. As an example, the recently brokered private placement in which Berkshire Hathaway took ownership of 6.125 million shares of cloud data warehousing company Snowflake (SNOW -1.18%) came with an initial cost of more than $700 million. That certainly sounds like a lot of money, but it's pretty much par for the course for Combs and Weschler. As investors for Berkshire, they typically make purchases ranging between $500 million and $1.5 billion. It would take a lot of Snowflake-sized deals to really amount to a sizable portion of Berkshire's cash.
But make no mistake about it, Combs and Weschler are influencing Berkshire Hathaway's portfolio. A company like Snowflake, which offers a compound annual growth rate of 70% over the next five years, provides cutting-edge technology exposure that simply wouldn't exist if Buffett weren't allowing his team some investment autonomy.
Warren Buffett has a narrow investment focus
Lastly, Buffett's unwillingness to put a lot of Berkshire's capital to work might reflect his narrow investment focus.
As noted, Buffett is going to have his say on whether or not Berkshire Hathaway makes a large investment or acquisition. However, Buffett's investment expertise typically lies with bank stocks, insurers, consumer staples stocks, and utilities. There are certain sectors into which Buffett simply doesn't venture. If the sectors Buffett doesn't follow offer significant value or serious growth potential, it means Buffett and his company may miss out on opportunities.
For instance, I'd bet my house that Buffett has no real clue what cloud computing stocks do, which means he'd probably never sign off on Berkshire making more than a $700 million investment into a company like Snowflake.
Buffett also tends to avoid healthcare stocks generally, and drug developers specifically. The Oracle of Omaha doesn't have the time to keep up with clinical trials, and probably isn't a fan of the finite exclusivity period associated with brand-name drugs.
Unless there are clear deals in the sectors or industries that Buffett follows, there's little chance of Berkshire Hathaway putting its cash hoard to work.