Warren Buffett is arguably the world’s greatest investor. But now even he can’t find anything to buy. Maybe you should hang fire too, says Matthew Lynn.
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For half a century, Warren Buffett has been arguably the world's greatest investor, and has made himself one of the planet's richest men. He bought into PetroChina as China was industrialising fast, making a 720% profit in five years. His stake in Freddie Mac, the American mortgage giant, netted a 1,500% gain over 13 years. Overall, his Berkshire Hathaway a strange hybrid between an investment trust and an industrial and financial conglomerate has made average annual compound returns of 22% over an epic 49 years, earning anyone who invested at the beginning a returns of 1,750,000% over that period.
But last week, at Berkshire's annual meeting, alongside castigating himself for missing out on the tech boom, Buffett admitted that his cash pile was growing and growing. It is now past $100bn, and may reach $150bn soon. This raises a troubling question for investors everywhere. If even Buffett can't find a way to invest $100bn profitably, what hope is there for us lesser mortals?
Of course, it's possible that Buffett has lost his touch. He has had a fantastic run for five decades. It would hardly be a great shock if the 86-year-old no longer understood where the world was going. Maybe he just doesn't understand the firms that are doing well in 2017 in the way he did in 1957 or 1967. However, there is another more disturbing possibility. Maybe there just isn't much left to buy.
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Valuations are stretched everywhere. The S&P 500 index is on a cyclically adjusted price/earnings (p/e) ratio that is now 70% above its long-term average. Amazon is on a p/e of 180 Buffett might be kicking himself in public for not buying it, but it isn't hard to understand why he thought it overvalued. Most eurozone markets are close to record highs, and so is the FTSE 100 index. You can make a case that Japan is cheap but an equally convincing one that it isn't. Bond yields are at record lows.
Over the last six months several European bonds have been trading at negative yields, meaning it actually costs you money to own them. It is hard to see the value there. Commodities are not as high as they were, but have hardly crashed from the bull market of the last decade. Neither housing nor commercial property are cheap.
Central banks have inflated the price of assets everywhere. The US may have stopped quantitative easing (QE) and started gently raising interest rates, but its peers around the world are nowhere close to that point. The Bank of England launched some extra QE right after the referendum vote last summer, and cut interest rates again it now looks unlikely to raise them until after we leave the EU.
The European Central Bank is still printing €60bn a month, and the Bank of Japan shows no sign of withdrawing stimulus. Indeed, central banks in Europe and Japan are even starting to buy equities directly, pushing up prices even further. And no central bank has even begun to think about withdrawing all the extra cash it has pumped into the economy and the chances are they never will.
Buffett has always bought into firms with strong brands when he thinks the price is attractive. There aren't many of those out there any more. He is sitting on his cash, perhaps you should too. Better to look stupid missing out on a stockmarket craze than look even more stupid buying into the top of a bubble.
Who's getting what
Fresh from weeks of holidaying in the British Virgin Islands and French Polynesia, former US president Barack Obama arrived in Milan to give a speech on Tuesday. Some 3,500 people paid €850 for tickets to the sell-out event, which raised almost €3m for the Obama Foundation, which champions "renewal and global progress".
Investor advisory firm Pirc has prompted its clients to vote against the remuneration packages for BAE, Barclays, ITV and Prudential, citing excessive bonuses. Mike Wells, the head of Prudential, was awarded bonuses equal to 432% of his £1.1m salary, making Wells 73 times better paid than his average employee.
Nicholas Moore, chief executive of Australian investment bank Macquarie, received A$18.7m (£10.7m) for the year to March 2017, inclusive of his $818,804 base salary, with the rest coming from share and bonus schemes. Net profits at the bank rose by 7.5% to A$2.2bn during the same period, beating analysts' expectations.
American pharmaceutical giant Mylan paid its chief executive, Robert Coury, nearly $100m in 2016, despite a public outcry over the sharp price rise for its lifesaving EpiPen. Once $59m in pension and other payments are factored in following his "transition from executive chairman to a non-employee chairman role", Coury banked almost $157m for the year.
Nice work if you can get it
The world's top five technology companies are minting millionaires at an unprecedented pace, says The Sunday Times. Between them, Apple, Amazon, Microsoft, Facebook and Google's parent company, Alphabet, handed out stock awards that were more than 60% higher on average than the bonuses paid out to workers in Britain's financial services industry. A combined $20bn was awarded for 2016, on top of salaries, due to a rise in share prices, equating to $29,850 for each of the quintet's 670,000 employees. Facebook was the most generous, forking out an average $188,000 for each of its 17,048 workers, while Alphabet paid out the most a total of $6.7bn. Apple paid $4.2bn, Amazon $2.9bn and Microsoft $2.7bn.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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