3 Investors Sitting on Huge Cash Stockpiles

Buffett, Klarman and Watsa

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Nov 21, 2017
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With markets climbing to record highs Tuesday, three investing powerhouses await changes in the market and economy. Warren Buffett (Trades, Portfolio), Seth Klarman (Trades, Portfolio) and Prem Watsa (Trades, Portfolio) each have amassed huge cash stockpiles ready to deploy when better deals emerge.

Warren Buffett (Trades, Portfolio), CEO of massive conglomerate Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), claims the largest coffers of the three. Cash on the company’s balance sheet, which Buffett uses to make giant purchases, topped records this year, amounting to around $100 billion.

According to him, he has allowed the mountain to grow not because of pessimism about markets but due to the lack of big, quality deals a heady market has afforded. Because of the immense size of Berkshire, Buffett must make accordingly large deals to “move the needle.”

In May, Buffett told CNBC that he hated cash, calling it "a holding position until you find something else."

"Buffett prefers a 7 year pay back period, which is about 14 percent return on investment, so a $50 billion dollar acquisition would need to return $7.15 billion every year," Adam Parris, founder and educator at Searching for Value, said. "So the question to ask is what company is trading with a market in excess of $50 billion that meets his investment criteria and will deliver him in-excess of $7.15 billion per year?" Â

Berkshire, which can pay hard cash for companies, has also been at a disadvantage to other players who borrow cheap money due to low interest rates, he said in the same interview.

In a rare event, Buffett lost in a bid to buy Texas power company Oncor for $9 billion after Sempra Energy foiled his plan with an offer $450 million higher in August.

At least some of the money has flowed into common stocks, but it slowed to a trickle in the third quarter. He or one of his deputy investors, Todd Combs and Ted Weschler, added only to stakes in Synchrony Financial (SYF), Monsanto Co. (MON) and Apple (APPL), increasing neither by more than 20%. It marked a change for Apple, though, where he poured money for the past three quarters and made it a “big-four” position in early 2017.

"I strongly believe that Buffett will sit on it for a prolonged period of time," Paul Koger, head trader of Foxy Trades said. "He has firmly stated that the markets are priced at levels that are beyond reasonable valuations. And as his main strategy is to find $1 bills being sold for 50 cents, there aren't many lying around these days."

Seth Klarman (Trades, Portfolio)

The author of the cult classic book, “Margin of Safety,” famed value investor Seth Klarman (Trades, Portfolio) buys stocks trading at a discount from their intrinsic value, providing a cushion for any price declines. Fully valued stocks hold little appeal for the Baupost Group investor.

According to Business Insider, the guru, who keeps a low media profile, also has roughly 40% of its assets in cash as of the end of the third quarter.

Klarman shed four positions from his $8 billion portfolio in the third quarter, including a sizable holding of Qualcomm (QCOM) that represented 3.3% of the long positions.

Of his 10 purchases during the quarter, most were from the healthcare industry, the third best-performing of the year with a 17.35% rise. The most represented in the portfolio is energy, the worst performing. Roughly 23% of the long positions in the portfolio were in energy, which declined 10.7% -- the only S&P 500 sector in negative territory year to date. The broader S&P 500 index has gained 15.3%.

Klarman also continued purchasing stocks, buying four and adding to seven existing holdings. His largest positions in the third quarter were medical distribution company McKesson Corp. and entertainment company AMC Entertainment Holdings Inc. (AMC).

Prem Watsa (Trades, Portfolio)

Prem Watsa (Trades, Portfolio), head of insurance conglomerate Fairfax Financial (TSX:FFH, Financial), has also amassed a fortune to spend in case a “hard market” develops, he said in a recent conference call.

Watsa’s outlook has improved since the election of President Donald Trump in November, before which he had fully hedged his portfolio for years.

“But we continue to think the new administration’s policies may make this a stock picker’s market,” Watsa said on the call.

Watsa also has $17 billion ready to deploy and 43% of his portfolio in cash ready for future opportunities. The investing giant said that after playing defense for years, it is ready to play offense. At the same time, Watsa did not rule out the usefulness of the cash should volatility return to markets next year.

"Fairfax expects to have an excellent year in 2017 in spite of the catastrophe losses, with cash and marketable securities at record levels - and we are prepared if a hard market develops in 2018," he said in a release.

In the third quarter, Watsa started 19 new positions, a radical shift from the previous quarter, when he bought no stocks and added to only two holdings. His biggest picks were Alere Inc. (ALR, Financial), Chicago Bridge & Iron (CBI, Financial) and Cray Inc. (CRAY, Financial).