Warren Buffet Investing: How You Should View Cash

Some investors are still shell-shocked from the 2008 market collapse. 4 years after the devastating fall in markets, investors continue to be afraid and mutual fund assets continued to be withdrawn. As a result, investors are piling up on bonds or cash. PIMCO’s mini total return fund ETF (BOND) is up around 8%.

For many, cash is viewed as a declining asset value with zero-percent interest and value that’s eaten away by inflation. Buffett views cash differently. Schroeder, who wrote The Snowball: Warren Buffett and the Business of Life, is familiar with Buffett’s way of thinking. She argued that to Buffett cash is a call option that can be priced.  When the option is cheap relative to the ability of cash to buy assets, it is acceptable to hold lots of cash.

The Economist rationalized Buffett’s superior returns were due to employing leveraging and buying low-beta companies. Yet Buffett achieved outperformance earlier in his career without the use of leverage. Buffett simply valued the share as part of the business, and bought them when it was offered at a reasonable price. Buffett would demand a margin of safety in his investments.

Buffett’s Cash Hoarding Explained

The “call premium” on cash is the difference between what Buffett can earn somewhere else, and the zero-return holding cash. Investors must therefore compare the cost of holding cash against the return that could be made if it were used to buy other assets that are cheap.

Buffett’s Berkshire Hathaway had $43.2 billion in cash as of June 30 2012. On September 26, Berkshire announced a buy-back of its shares. It said it plans to buy back shares at a premium of no more than 10% of book value of its shares.

Business Section: Investing Ideas

Berkshire’s most recent investing activity was most recently available at the end of June 2012.  Keep in mind that the investment decisions are also being made by recently hired fund managers.

Berkshire started new positions in these two companies:

1. National Oilwell Varco, Inc. (NOV, Earnings, Analysts, Financials): Designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide. Market cap at $34.16B, most recent closing price at $80.11.

2. Phillips 66 (PSX, Earnings, Analysts, Financials): Market cap at $29.07B, most recent closing price at $46.37.

Berkshire reduced its stake in these companies:

3. Kraft Foods Inc. (KFT, Earnings, Analysts, Financials): Together with its subsidiaries, manufactures and markets packaged food products worldwide. Market cap at $73.38B, most recent closing price at $41.35.

4. General Electric Company (GE, Earnings, Analysts, Financials): Operates as a technology, service, and finance company worldwide. Market cap at $239.79B, most recent closing price at $22.71.

5. Visa, Inc. (V, Earnings, Analysts, Financials): Operates retail electronic payments network worldwide. Market cap at $108.92B, most recent closing price at $134.28.

6. Ingersoll-Rand Plc (IR, Earnings, Analysts, Financials): Engages in the design, manufacture, sale, and service of a portfolio of industrial and commercial products in the United States and internationally. Market cap at $13.82B, most recent closing price at $44.82.

7. Dollar General Corporation (DG, Earnings, Analysts, Financials): Operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. Market cap at $17.2B, most recent closing price at $51.54.

8. CVS Caremark Corporation (CVS, Earnings, Analysts, Financials): Operates as a pharmacy services company in the United States. Market cap at $61.6B, most recent closing price at $48.42.

9. Johnson & Johnson (JNJ, Earnings, Analysts, Financials): Engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Market cap at $189.99B, most recent closing price at $68.91.

10. Procter & Gamble Co. (PG, Earnings, Analysts, Financials): Provides consumer packaged goods in the United States and internationally. Market cap at $191.25B, most recent closing price at $69.36.

11. United Parcel Service, Inc. (UPS, Earnings, Analysts, Financials): Provides transportation, logistics, and financial services in the United States and internationally. Market cap at $68.6B, most recent closing price at $71.57.

Its position in Intel (INTC) was closed.

Finally, its holding size increased for these five companies:

12. International Business Machines Corp. (IBM, Earnings, Analysts, Financials): Provides information technology (IT) products and services worldwide. Market cap at $237.07B, most recent closing price at $207.45.

13. The Bank of New York Mellon Corporation (BK, Earnings, Analysts, Financials): Provides various products and services worldwide. Market cap at $26.72B, most recent closing price at $22.62.

14. Liberty Capital Group (LMCA, Earnings, Analysts, Financials): Market cap at $12.45B, most recent closing price at $104.08.

15. DaVita, Inc. (DVA, Earnings, Analysts, Financials): Provides kidney dialysis services in the United States. Market cap at $9.8B, most recent closing price at $103.61.

Written by Chris Lau.

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Dig Deeper: Access Company Snapshots, Charts, Filings

• National Oilwell Varco, Inc. (NOV, Chart, Download SEC Filings)
• Phillips 66 (PSX, Chart, Download SEC Filings)
• Kraft Foods Inc. (KFT, Chart, Download SEC Filings)
• General Electric Company (GE, Chart, Download SEC Filings)
• Visa, Inc. (V, Chart, Download SEC Filings)
• Ingersoll-Rand Plc (IR, Chart, Download SEC Filings)
• Dollar General Corporation (DG, Chart, Download SEC Filings)
• CVS Caremark Corporation (CVS, Chart, Download SEC Filings)
• Johnson & Johnson (JNJ, Chart, Download SEC Filings)
• Procter & Gamble Co. (PG, Chart, Download SEC Filings)
• United Parcel Service, Inc. (UPS, Chart, Download SEC Filings)
• International Business Machines Corp. (IBM, Chart, Download SEC Filings)
• The Bank of New York Mellon Corporation (BK, Chart, Download SEC Filings)
• Liberty Capital Group  (LMCA, Chart, Download SEC Filings)
• DaVita, Inc. (DVA, Chart, Download SEC Filings)

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