Five minutes a week that makes you smarter and calmer about your own money — plus a look at what I’m actually doing with mine…
For about twenty years, the world’s most successful investor Warren Buffett, has told anyone who asked that missing Google was the worst call he ever made.
He had every advantage. He knew the founders. And he owned GEICO, the American car insurer, one of Google’s earliest big advertisers — paying Google ten or eleven dollars every time somebody clicked one of its adverts.
Here’s how he put it at Berkshire’s annual meeting in 2017: “Any time you’re getting $10 or $11 when somebody just clicks a little thing where you’ve got no cost at all, that’s a good business.”
He owned the company writing the cheques. He just never thought to buy the company cashing them.
He later put that right, and has just topped up his holding by another $10 billion…
THIS WEEK IN 30 SECONDS
Buffet’s company, Berkshire Hathaway bought more shares than it sold for the first time in three and a half years, spending nearly $32 billion of its cash mountain. That change in sentiment is a huge deal — what’s coming?
America lost 23,000 jobs in July when economists expected it to add 83,000 — and shares hit a record high anyway.
Buffett bought another $10 billion of Alphabet shares, bringing his total to over 30 billion.
THIS WEEK IN MONEY
Berkshire started buying again, after three and a half years of selling
Berkshire reported its results on Saturday. The headline isn’t the profit. It’s that Buffett’s company was a net buyer of shares for the first time in fourteen quarters.
The cash pile fell from $397.4 billion to $365.5 billion. Around $20 billion net went into shares. The biggest cheque we know about is the $10 billion that went to Alphabet in June, taking Berkshire’s stake there to roughly $31 billion — its third largest holding, behind Apple and American Express.
Buffett stepped down as chief executive in January after sixty years, and Greg Abel runs the company now, so most people assumed the Google bet was the new man making his mark. It wasn’t. Buffett told CNBC in July: “I initiated it.”
What it means for you: Not that you should rush out and buy Google. It’s that the most patient investor alive sat on nearly $400 billion in cash for three and a half years, while plenty of people said he’d lost his touch. He didn’t buy because nothing looked worth buying. Then something did, and he moved quickly.
Sitting in cash because you can’t find anything you like is a decision. Sitting in cash because you’ve never got round to it isn’t.
America lost jobs last month, and the stock market went up
First, let me explain what these numbers actually are, because they get quoted constantly and explained almost never.
On the first Friday of each month the US government publishes its jobs report. The headline figure — non-farm payrolls — comes from a survey of about 120,000 employers and counts how many jobs were added or lost across the country last month. It moves markets more than any other scheduled number in the world.
July’s figure landed on Friday. Employers cut 23,000 jobs when economists expected 83,000 to be added.
The S&P 500 responded to the bad news by closing at a record high of 7,757.64!
The market wasn’t pricing the economy, it was pricing interest rates. American rates have been going up, not down — three members of the Federal Reserve’s committee voted for a rise last month, largely because the war with Iran has pushed energy prices up.
A weak jobs report makes another rise in September less likely, so traders cut the odds of one from 55% to 44% and shares rallied on the relief.
WHAT I’M DOING
You can see every position I hold, and what each has done, on the portfolio pages — I refreshed all the figures this morning.
What I’m doing this week: Holding baby, holding…
Nothing much changes week by week. This is a long game. The S&P was fairly flat, Diageo was the week’s one clear winner at up 8%, and there’s nothing much else to report.
What I am doing is starting to research opening a position in Alphabet. I’ll let you know what I find in a later issue. If Warren Buffett is interested to the tune of $10 billion, then I think it’s at least worth a look.
Free readers get the thinking. Full members get the specifics — every holding, every buy and sell as I make it, and the real performance figures.
ONE THING WORTH UNDERSTANDING
Berkshire also spent about $4.5 billion buying its own shares last quarter. Buybacks are one of the biggest forces acting on your portfolio, and hardly anyone explains what they do.
When a company buys its own shares, it cancels them. They stop existing.
Say a company has 100 shares and makes £100 of profit. That’s £1 per share. Now it buys back 10. There are 90 left and the profit is still £100, so that’s £1.11 per share. You didn’t do anything, but your slice of the profits went up 11%, because there are fewer people to share it with.
A dividend gives you cash. A buyback gives you a bigger share of the business.
The catch is that it only works if the company pays less for the shares than they’re worth. If it overpays it has burned your money, and plenty of companies buy back at silly prices because it flatters their per-share figures.
Berkshire only buys when Buffett and CEO Abel both reckon the shares are cheap.
A buyback only works if the company pays less than the shares are worth. Plenty don’t, so don’t assume it’s always a good thing.
MONEY MYTH OF THE WEEK
“Good news for the economy is good news for shares.”
Friday put paid to that theory, as we saw above. Share prices don’t track how the economy is doing. They track what investors think is going to happen next, and interest rates are usually the loudest part of that.
Which is why trying to trade the news is such a poor use of your time. You would need to be right about the news, right about how interest rates respond to it, and right about how everybody else is reading those two.
JARGON, DECODED
Private placement — when a company sells new shares directly to one large buyer, privately, rather than on the open market.
It’s how Berkshire bought its Alphabet stake. Alphabet wanted a very large cheque quickly to build AI data centres, so it went straight to the buyer with the deepest pockets in the world.
The bit worth noticing is the price. Alphabet closed at $380.34 on the Friday before. Berkshire paid $351.81 — 7.5% below the market price at that point. Investors buying into the same fundraising on the open market the next day paid $355.20, only about 1% more.
WORTH YOUR TIME
Book of the week: Trillions, by Robin Wigglesworth.
How the index fund was invented, told as a caper rather than a lecture — a cast of academics and misfits who set out to prove professional stock pickers were mostly kidding themselves, and ended up building the thing that put a lot of them out of business.
BEFORE YOU GO
Know someone who’s been sitting on cash, waiting for the right moment? Forward this to them.
See you next week.
Tim
P.S. No newsletter next week — I’ll be on a road-trip to La Rochelle on the Atlantic coast of France. It’s not all about work… sometimes it’s about oysters!
I am not a financial adviser. Nothing here is personal financial advice. Please do your own research before making any investment decisions.