I saw some news a few weeks ago about how much cash Berkshire Hathaway has, and a lot of people took it as a sign of the markets being overpriced. However, the amount didn't seem huge compared to how many assets the company has, so I started to look at that more this week.
I found a graph created by "The Motley Fool" which showed Berkshire Hathaway's short-term investments and cash compared against total assets. The $189 billion in cash they have right now (or had three months ago) is 17.7% of Berkshire's total assets. It's above the average of the last 10 years, but there have been moments when it has been higher, and between 2000 and 2010, the average was higher. So in the end, this huge $189 billion cash stash isn't actually abnormal at all.
Buffett famously has said that he doesn't like diversification but rather studies businesses well and picks a few winners. This has worked well for him. I agree with him to some extent. The reason why I wouldn't put all my eggs in one basket, even if I knew a company very well, is that there are so many unknown unknowns. What if a competitor creates new technology that previously seemed impossible to create? It's possible that by the time this information is public, people familiar with it could move faster than the markets. But for most investors, it makes sense to diversify rather than try to pick the winners and end up losing to the S&P 500. My personal strategy is to "play" with some amount of my net worth and have most of it invested in index funds. I'm expecting the index funds to give me an average return of 10% per year and then hoping the direct investments will give me more. My direct investments are mainly in tech companies which I like (CEO, culture, etc.) and whose products I use. My index fund investments are also tech-heavy, which is slightly against the idea of diversifying, but I believe AI will have the biggest impact on the tech sector. It's also a hedge against AI taking my job. If AI does take my job, at least I will benefit from it as well.
I have read the chairman's letters from Berkshire Hathaway's annual reports, but I didn't remember they had a comparison of how the company did against the S&P 500. It starts from 1965, and the S&P 500 (with dividends) has given an average return of 10.2% (2023), while Berkshire Hathaway has returned 19.8%. That's much more than I expected.
When Buffett steps down from Berkshire, it's interesting to see how the stock reacts. It probably drops at least by some amount because there is uncertainty about whether his successors can maintain this quality. I personally believe he is good at passing his knowledge, and he has already prepared other people to take his responsibilities, so the company will continue performing well for at least the next 20-30 years.