For one weekend a year, the spotlight of the financial world shifts from New York to Nebraska. The annual meeting of the Berkshire Hathaway company has developed a cult following among shareholders and financial journalists alike. A compound annual return of 20% over 55 years (!) will do that for you.
Actuarially speaking, the number of opportunities to see Warren Buffett, 91, and his longtime partner Charlie Munger, 98, on stage together at the annual meetings is dwindling. One area of particular interest for the Oracle of Omaha’s followers in recent months has been Berkshire’s overflowing war chest. At the end of 2021, Berkshire’s balance of cash, equivalents, and short-term treasuries stood at nearly $144 billion, compared to $71 billion at the end of 2016, and “just” $34 billion ten years prior.
The consummate value investor, Mr. Buffett attributed the growing cash stockpile to an absence of compelling investment opportunities. Better to hold cash than make bad investments, after all. Market volatility in the early months of 2022 did loosen the purse strings a bit as Berkshire made a large acquisition (Alleghany Corp) and built large positions in three publicly traded companies (HP, Occidental Petroleum, and Chevron). All told, the first quarter investing activity drew cash down to approximately $105 billion, which is still enough to cover payroll for a while.
Mr. Buffett certainly doesn’t need us to remind him of the perils of “lazy capital” on the corporate balance sheet – the yearend cash stash represented approximately 20% of Berkshire’s overall market capitalization. Giving Mr. Buffett the benefit of the doubt (which he has probably earned at this point in his career), are there any good reasons for family businesses to hold some cash in reserve? In our view, there are three potential benefits to keeping some cash on the balance sheet.
As the adage goes, no one goes bankrupt holding cash. While modern finance theory suggests that public company managers should not be willing to sacrifice much return to reduce bankruptcy risk, family business directors cannot be so sanguine. Since the family business often represents a significant portion of overall family wealth, corporate bankruptcies are catastrophic for the family. Some families can leave a bit of marginal return on the table if it helps push the likelihood to financial distress to a negligible level. There is no single right answer that will fit every family; however, directors need to acknowledge the tradeoff, calculate the decrement to return from holding cash, and be deliberate about the decision they make.
Fund Opportunistic Investments
Cash is the contrarian’s friend. You can keep wealth by staying in the middle of the investment pack, but you only get wealthy by venturing away from the pack, buying when prices are depressed and other investors are afraid to invest. Or, don’t have the liquidity to invest. While describing the stock market as a “gambling parlor” at Saturday’s meeting, Mr. Buffett acknowledged that the attendant market volatility allowed Berkshire to identify attractive investments saying, “We depend on mispriced businesses.” Unfortunately, credit availability is inversely related to the volume of attractive investment opportunities. To take full advantage of market dislocations, sometimes it helps to be your own banker. Ample cash on the balance sheet can afford your family business that luxury.
Be Strategic About Ownership
In addition to making opportunistic investments, Berkshire has also used its cash hoard to repurchase over $50 billion of shares during 2020 and 2021. So long as markets are efficient, share repurchases are, by definition, a zero net present value project. While Mr. Buffett would prefer to make investments in other businesses, when he believes that attractive opportunities are not available, he has not been averse to buying Berkshire shares.
Berkshire doesn’t really care about the identity of its owners. Shareholders come and shareholders go. When Berkshire repurchases shares, it does so in open market transactions, not knowing – or caring – who the selling shareholders are. Family shareholders can be described in many ways, but anonymous is not one of them.
DNA is not a reliable indicator of whether an individual will be an effective family shareholder. As a result, there is – for many families – a significant difference between what the shareholder list is and what the shareholder list should be. The capacity of many families to “muddle through” with suboptimal ownership for years and even decades is remarkable. But other families elect to make ownership a strategic priority. It is much easier for families to be intentional about who owns shares in the family business when there is enough liquidity on the corporate balance sheet to repurchase shares from departing shareholders.
We have previously sounded the warning about allowing excess cash and other non-operating assets to accumulate on family business balance sheets. We stand by that warning, but the example of Berkshire Hathaway does highlight that – in addition to its (opportunity) costs – cash has its uses. Is there a purpose behind the cash on your balance sheet? Have you accumulated cash with intention or through inattention? What is your cash doing for you?