Warren Buffett better stick to Bridge (a game where people truthfully signal what they have) because he would be terrible as a poker player. He is like the guy that can’t conceal his excitement, announces truthfully he has aces and moves all-in pre-flop.
This week he went to the bond market and raised $9 billion. Does Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) really need it? No. Sure, it is comfortable to raise liquidity now that it is still easy, and so Buffett did. But is that all there is to it? I don’t think so. Interestingly Buffett said last year he would short bonds only if Berkshire were able to do so efficiëntly:
“If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I’d do it,” Buffett said Monday on CNBC. “But that’s not my game, and it can’t be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I’ll put it that way.”
Well, that’s almost exactly what he is doing now, issuing $9 billion of bonds with maturities up to 2026.
Berkshire is an AA issuer and we can’t exactly copy this move by issuing bonds ourselves or going to the bank and taking out a loan. At least, I don’t think you would get an interest rate of just 1.5% over the risk-free rate.
What you could do to mimick Buffett is short a corporate bond ETF. It’s not exactly the same thing, but it comes pretty close. An added benefit is that you pick up the management fee. If possible, pick the ETF with the highest management fee. On the downside you’ll have to pay borrowing costs for your shares.
One example of a bond ETF that could be used in this manner is the iShares Core U.S. Credit Bond ETF (LUCRTRUU, Financial). I picked it because its holdings have an average maturity date 10 years out, which matches the duration of the Berkshire issued debt. Unfortunately its expense ratio is a mere 0.15%, which is a drawback here. The weighted average coupon of the holdings is 4.14%. The top holdings include European Investment Bank, KFW, Verizon Communications (VZ, Financial), Bank of America (BAC, Financial), JPMorgan Chase (JPM, Financial), Goldman Sachs (GS, Financial) and Morgan Stanley (MS, Financial).
Buffett does use the money from the proceeds of the bond offering to repay a bank loan used to finance the Precision Castparts acquisition. Although Berkshire keeps a substantial amount of cash on its balance sheet, you could say Buffett does use the money to finance the acquisition of productive assets. You could mimick him in that regard by buying a productive asset with the proceeds from the short sale. Just going short a bond ETF and holding the cash is feasible, but it requires a strong conviction on the direction of bonds. Finally, I would note that Buffett only issued $9 billion of bonds while the enterprise value of Berkshire is $348 billion. So, this issuance is probably not going to mess up Berkshire’s terrific credit rating.
