Buffett: $24 Billion Gain ‘Subpar’
Despite reporting a $24 billion gain in 2012, the chairman and chief executive officer of Berkshire Hardaway still claimed this performance “subpar”. In the past year, the value of Berkshire Hardaway raised 14% compare to a 16% return of Standard & Poor 500-stock index. This is only the 9th time in the 48 years that Warren Buffett manages this company.
Two years ago, Berkshire Hardaway has started looking for large acquisitions to increase their portfolios. However, the failure of finding good large targets puts Berkshire Hardaway in an awkward position.
Believe it or not, it takes a lot of time and researches before Mr. Buffett would actually take an action to invest. That is because he would rather to wait for good opportunities than risk his shareholders money to speculate.
However, the cash holding position of Berkshire Hardaway keeps on growing. The cost of holding these cash will also become greater and greater. The biggest cost would be opportunity cost. Opportunity cost means the value of the best alternative that you have. If you are holding the cash instead of investing them, then your opportunity cost is the returns from investing the money.
Berkshire Hardaway is currently holding about $47 billion cash in hand. If S&P 500 index advances another 16% in the following year and Berkshire Hardaway holds on to these cash, then the opportunity cost of holding these cash would be as great as $7.52 billion. This amount is approximately about 30% of their $24 billion gain this year.
Source: Das Anupreeta and Erik Holm “Buffett: $24 Billion Gain ‘Subpar’”. Wall Street Journal, Mar 1, 2013