Buffett is shunning debt while much of corporate America loads up on it. Wonder who’s going to be right. From Simon Black at sovereignman.com:
In our discussion on Monday, we talked about the latest annual letter from Berkshire Hathaway, Warren Buffett’s holding company.
The big takeaway from that piece is that Berkshire Hathaway now holds a record $116 billion in cash.
More importantly, Buffett is NOT a buyer right now.
As he wrote in his letter…
“[P]rices for decent, but far from spectacular, businesses hit an all-time high.”
As we talked about on Monday, when the most successful investor of our era is telling the world that he’s NOT buying (because stocks are too expensive), AND that he’s cashing up to record amounts, it’s worth listening.
Buffett knows that all markets move in cycles. We’ve been in an UP cycle for a long time. And as sure as night follows day, there will be a down cycle.
That’s what he’s preparing for… because those down cycles are where there is extraordinary opportunity to make a lot of money.
But if you want to take advantage of those opportunities, you have to have cash. Lots of it.
That’s how Buffett is positioning himself. And, if you haven’t already, it’s worth considering following in his footsteps.
But if you look at corporate America as a whole, they’re taking the opposite stance.
The debt of nonfinancial companies grew $1 trillion in just two years through the third quarter of 2017, reaching a total of $8.7 trillion – nearly 45% of US GDP.
Record-low interest rates have spurred companies to take on more and more debt.
Sometimes debt can make sense.
But more often than not, excessive debt becomes incredibly dangerous for a business (or government… or individual).
In many cases, these companies aren’t taking this debt on for any good reason. It’s only because they can. And that’s insane.
As Buffett said in his letter:
“Our aversion to [debt] has dampened our returns over the years. But Charlie [Munger] and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”
Take our perennial whipping boy, Netflix, for example.
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