What Warren's Grandpa Taught Him
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Oracle of Omaha, Warren Buffett, and CEO of Berkshire Hathaway (NYSE: BRK-B) has a lot to teach us investors but who taught him? A letter he found from his grandfather sent to Warren's aunt and uncle dating from 1940 explains a gift of $1,000 in cash he left them. Ernest, Buffett's grocer grandpa, went into great detail why he felt everyone should keep some ready cash. Not to invest it- just put it somewhere safe.
Buffett has taken his grandfather's advice to heart saying,"At Berkshire we have taken his $1,000 solution a bit further and have pledged that we will hold at least $10 billion of cash, excluding that held at our regulated utility and railroad businesses. Because of that commitment, we customarily keep at least $20 billion on hand so that we can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina,the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities."
A poignant letter
Everyone should be so lucky as to have an Ernest Buffett in their life. His letter goes on to say,"I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business."
He adds he has accumulated the cash hoard for Buffett's aunt and uncle since 1930 and has done it for some of the other Buffetts. Ah, you say a Depression era mentality. This mentality has worked for Buffett as he's been able to hone in on big deals like Heinz or the $34 billion purchase of Burlington Northern Santa Fe in 2009.
Despite the obvious advantages of having some ready cash for both companies and investors, cash has become a dirty four letter word. Cash equals love to Ernest Buffett and that's why he saved for his children, "Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time."
In God We Trust, All Others Pay Cash
Yes, maybe Greenlight Capital's David Einhorn should have had a great-grandpa like Ernest and then he could respect what Apple (NASDAQ: AAPL) has been doing with their $137 billion in cash. They have been investing it in various low-return safe havens:CDs, funds and the like. They have a share repurchase program in place and more. Thank goodness he finally dropped his lawsuit against Apple. But the drumbeat goes on.
Steve Jobs pretty much laid it on the line, exactly how a latter day Ernest would have,"We've demonstrated a strong track record of being very disciplined with the use of our cash. We don't let it burn a hole in our pocket, we don't allow it to motivate us to do stupid acquisitions. And so I think that we'd like to continue to keep our powder dry."
Apple needs to get out something new and cool. And soon. Use that cash for the next big thing, whatever was a glimmer in Jobs' dimming eyes. (RIP, Steve. We miss you!). Apple just hit a 52 week low of $429.98 on March 1 mainly because at the shareholders' meeting CEO Tim Cook said the company was "looking at" some projects. Apparently, this set investors off on an OMG twitter and web frenzy that the Kardashians would envy. The interpretation of dark and deep meanings into every nuance of Cook's answers on upcoming products would do boycrazy teenagers proud.
That said, rumors of an iPhone 5s keep hitting the headline feeds and briefly lift the spirits of Apple longs, but not for long. And then the moaning of "where oh where is the Apple TV" commences. Even if Apple is (or recently was) the most innovative company I'm sure Buffett doesn't envy Tim Cook although Apple stock now at a 9.76 P/E with a 2.40% yield and a .52 PEG looks good.
Apple's not the only hoarder
Google (NASDAQ: GOOG) also has a large cash hoard of $40 billion and offers no yield yet has crossed $800 in share price. Its P/E and PEGs are more than twice as high as Apple's at 25.3 and 1.28, respectively.
Google is up over 31% over the last year while Apple is down almost 38% since its high of $705 last fall. Has the world gone mad? Sure, it was overbought but if it goes to $350 I can't believe people won't come back especially if they raise the dividend.
As for Berkshire Hathaway it hit a 52-week high on Feb. 28 after reporting a 49% gain for Q4. Buffett called the performance "subpar" as he called most of those paper gains but the ever-humble Buffett's company grew net income to $4.55 billion from $3.05 billion in the year ago quarter. Berkshire-B is up 28.90% over the last 52 weeks.
Cash isn't a dirty word
At what point does this cash issue go away? The bigger issue is new product for Apple to keep up with a perceived Google superiority with Android and new products like Google Glass. Buy Google at your peril as the lemmings who've bought in on the Google Rush could hurt as much as those who bought into the Apple rush.
Buffett and Jobs, both great and visionary CEOs, undersood that cash is king. Those who held onto the Berkshire-A and Apple long term made huge gains. Funny enough, in the letter that Ernest wrote he says,"I might mention that there has never been a Buffett who ever left a very large estate, but there has never been one that did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well." I'd say so.
leglamp has no position in any stocks mentioned. The Motley Fool recommends Apple, Berkshire Hathaway, and Google. The Motley Fool owns shares of Apple, Berkshire Hathaway, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!