Berkshire Hathaway's (BRK.A 0.15%) (BRK.B 0.37%) third-quarter earnings report revealed some interesting details about how Warren Buffett and his investing team have managed their portfolio over the last three months.
Berkshire continued to be a net seller of stocks in the third quarter. The company sold off stakes in Hewlett Packard and Chevron, among others. That resulted in Berkshire's cash and cash equivalents position reaching a new all-time record of $157.2 billion.
But Buffett and his team added $29 billion to their position in short-term U.S. Treasury bills last quarter, bringing their total investment to more than $126 billion. Buffett has long been against investing in long-term bonds, but Berkshire's increased position in government bonds should pay handsomely while it waits for a new buying opportunity to come along.
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The only short-term investment Buffett likes
Warren Buffett is a firm believer in the ability of equities to outperform bonds in the long run, and he's held that position for decades.
In his 1979 letter to Berkshire Hathaway shareholders, he called out a bond-buying mistake he made: "It was a mistake to buy fifteen-year bonds, and yet we did; we made an even more serious mistake in not selling them (at losses, if necessary) when our present views began to crystallize."
In the company's quarterly reports these days, management notes, "We continue to believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments."
In today's environment, though, Buffett can get the best of both worlds.
Treasury bills, a term that commonly refers to U.S. Treasury securities maturing in one year or less, currently offer better yields than longer-term bonds. The yield curve is inverted right now because investors believe the Federal Reserve will start lowering interest rates in the near future. So, when a short-term bond matures, the bondholder might not have those high interest rates available to reinvest the proceeds.
Last quarter, Buffett decided to move a lot of Berkshire's cash from bonds maturing within three months to slightly longer-dated bonds, though ones still maturing within one year. The six-month bill currently offers the best yield among U.S. Treasuries. So Buffett likely just rolled out three-month bills to those with maturities of six to 12 months.
Three-month bills fall into Berkshire's cash and equivalents line item, while anything maturing later, but still within one year, would fall into the short-term investments in U.S. Treasury bills line item. The former decreased by $19 billion last quarter, while the latter increased by $29 billion.
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Key Data Points
Should you be buying Treasury bills, too?
Treasury bills are a great place to stash cash if you'll need it in the short term.
They're backed by the full faith and credit of the U.S. government, making them very safe. The risk comes from changes in interest rates, which could negatively impact the price of the bond in the open market if you want to sell it before it matures. If you plan to hold the bond until maturity, it's very unlikely you'll lose money.
In fact, 10-year Treasury note yields are commonly referred to as the "risk-free rate," a benchmark for returns on investment alternatives. If you're making an investment today, you should expect it to return more than the 10-year Treasury over time. Otherwise, you'd just invest in Treasuries.
Whether you should buy Treasury bills or longer-dated bonds will depend on your goals. Someone nearing retirement, for example, is likely more interested in capital preservation than capital appreciation. They may be willing to lock in the current yield on Treasuries in exchange for lower volatility. (Again, market prices for bonds are dictated by changing interest rates, but holding a bond to maturity will result in you achieving the stated yield of the bond when it was issued.)
But investors planning for the long term -- those that adopt the Buffett mindset and want to maximize their potential returns -- will want to ensure they maintain liquidity so they can invest in equity opportunities when they come up. And just because few stocks fit the bill for Buffett this year doesn't mean there aren't great investment opportunities for you to put your excess cash to work in right now.
