Charlie Munger Hoarding Cash: ‘There’s Nothing We Can Stand Buying’ – Our Approach

The stock market is coming off one of its worst years in a long time. The S&P 500 (SPY)(VOO) and the Nasdaq (QQQ) got routed in 2022, as did high-growth innovative tech (ARKK):

With so many stocks getting whacked last year, many investors are buying stocks hand-over-fist to snatch up those that are selling at multiples not seen in a long time. That said, despite this massive sell-off in the markets, one of the world’s most revered value investors – Berkshire Hathaway (BRK.A)(BRK.B) – is largely remaining on the sidelines, with its cash hoard remaining extremely large.

Warren Buffett’s right-hand man Charlie Munger explains that this is “because there’s nothing we can stand buying” right now.

In this article, we share our view of his remarks and our approach in the current environment.

Mr. Munger’s Comments

First of all, it is important to note that Charlie Munger and Warren Buffett were not completely sitting on their hands in 2022. In fact, they were buying energy stocks (XLE) hand over fist, led by their growing stake in Occidental Petroleum (OXY) along with purchases of Chevron (CVX). This investment proved to be one of the more prudent ones to make in 2022, more than doubling investor money over the course of the year even as the broader markets crashed:

They were also buying back Berkshire stock over the course of 2022:

This also proved to be a market-crushing way to allocate capital last year:

That said, with an 11-figure cash hoard still on its balance sheet, Buffett and Munger clearly have a lot of dry powder left over and are hardly endorsing an all-in approach to investing in today’s markets. As Mr. Munger recently explained:

In my whole adult life, I have never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find…[Berkshire isn’t buying anything] because there’s nothing we can stand buying.

First of all, while Mr. Munger’s comments are pretty striking, they are clearly a bit hyperbolic and not all that surprising when considered in their broader context. First and foremost, a casual glance at Berkshire’s 13-F filings shows that Buffett and Munger were indeed finding stocks to buy in 2022, even outside of the energy sector. These purchases include a new stake in Taiwan Semiconductor (TSM) and making further additions to its sizable Apple (AAPL) stake.

Furthermore, when looking at the broader context of Berkshire Hathaway’s approach to investing, these comments are really not all that surprising. Buffett and Munger have long extolled the virtues of investing only within one’s circle of competence, so that alone significantly narrows the investing pool for the company. When you take into account that technology stocks experienced some of the worst pullbacks in 2022 and add that to Buffett’s and Munger’s long-standing aversion to investing in these more complicated business models that lie outside of their circle of competence, it makes sense why they are less attracted to the market today.

For example, Berkshire tends to be more interest in Dow Jones Industrial (DIA) businesses and this index had a much less dramatic pullback in 2022:

When combined with the dramatic increase in interest rates alongside persistent inflation and a declining macroeconomic and geopolitical picture in 2022, this all adds up to explain why much of Berkshire’s investable universe does not necessarily look all that attractive right now.

Another major factor here is that Berkshire Hathaway has become so large that it can only really invest in other large companies in order to make investments that truly move the needle for it. This further narrows Buffett’s and Munger’s investible universe by eliminating tens of thousands of potential investment opportunities.

Last, but not least, Buffett has long said that he prefers to buy entire businesses and integrate them into the Berkshire empire. However, in the current environment, private market valuations have remained quite richly valued relative to public markets, largely due to immense sums of capital pouring into the sector via private equity. As a result, there is truly nothing there that Mr. Munger feels like they can stand buying.

Our Approach

With all of this said, are we piling up cash as well in an attempt to time the market and follow Buffett’s and Munger’s lead?

Not at all. While we are cognizant of the fact that the stock market looks slightly overvalued based on a number of valuation models, we are not buying index funds nor are we primarily fishing in the pool of mid and large cap stocks.

At High Yield Investor, we fish for value in off-the-beaten-path areas of the market where we are finding significant value. Many of these businesses are either grossly misunderstood by Mr. Market due to their quirky corporate structure (for example, TFS Financial Corp. (TFSL) whom we recently interviewed), are subjected to negative headlines that bear little true impact on their underlying earnings (for example, Virtu Financial (VIRT), whom we also have done several deep-dive interviews with), or are relatively unknown and overshadowed in favor of their much larger peers despite their incredibly impressive growth profiles, wide moats, and very attractive valuations (for example, Patria Investments (PAX) whom we recently interviewed).

Investor Takeaway

When you take into account the unique investing approach and circumstances of Berkshire Hathaway, their decision to build a massive cash pile instead of going all-in on the current opportunities available to them in their investment universe makes a lot of sense.

At the same time, when taking into account that we at High Yield Investor deal with much smaller sums of money, we are finding plenty of very attractive opportunities to allocate our capital. As a result, we are not piling up cash, but are instead investing aggressively in numerous highly attractive, high yielding opportunities available in the current market. In so doing, we were able to generate ~10% total returns in 2022 and are well on our way to outperforming the market again in 2023.

When you are able to focus on off-the-beaten-path investments, you not only set yourself up for potential long-term alpha relative to the broader markets, you also enjoy a degree of non-correlation with the large index funds since your holdings are held in far fewer large ETFs and mutual funds.