By Nir KaissarWarren Buffett is waiting for one last fat pitch.The Oracle of Omaha released his annual letter to shareholders of Berkshire Hathaway Inc.
late last month and followed it with a marathon interview on CNBC two days later.
As in previous years, investors were eager to hear from Buffett about his succession plans and his assessment of markets, and he didnt disappoint.
What we learned is that, for Buffett, the two subjects are closely related.
As my Bloomberg Opinion colleague Tara Lachapelle has already pointed out, Buffett will turn 90 this summer, so succession is top of mind for him and Berkshires shareholders.
Buffett appears to have no doubt that the company will continue to thrive after hes gone.
I want them to look back and say, Gee, we should have made this change earlier, he told CNBC, adding that he feels terrific about Berkshire in the post-Buffett era and that its almost going to be embarrassing how well the company is prepared.
Which raises the question: Why wait? Buffett has more than earned his retirement after a career that spans more than six decades.
One answer is that Buffett is arguably the greatest investor of all time, and the great ones in any endeavor typically dont walk away from the game until they have to.
But I suspect the more important reason is that Buffett senses a historic investing opportunity coming, probably the last of his career, and he has no intention of watching from the sidelines.
Buffett has a knack for spotting trouble in financial markets.
Hes not one for big pronouncements, preferring instead to say he simply doesnt understand the things that concern him.
But dont be fooled.
He didnt understand internet companies in the 1990s before they roiled the stock market.
He was also puzzled by the widespread use of derivatives in the 2000s before they blew up the financial system.What vexes Buffett today is investors eagerness to part with their money for shockingly little in return.
It makes no sense to lend money at 1.4 per cent to the US government when its government policy to have 2 per cent a year inflation, Buffett said.
The government is telling you, Were going to give you 1.4 per cent and tax you on it, and on the other hand, were going to presumably devalue that money at 2 per cent a year.Its not just the government.
Were allowing people to borrow money on much weaker terms than we were five or 10 years ago.
You couldnt borrow money at all for a period 10 years ago.
I mean, literally, Berkshire couldnt borrow money.
Everything stopped.
And now the pendulum has swung dramatically and yet we still have very, very, very low rates.Buffett blames all that cheap money for driving up equity prices, particularly for outright purchases of companies, which he prefers to buying smaller stakes in public companies.
Theres quite a premium for buying whole businesses, according to Buffett, and part of the premium is because you can borrow so much money so cheaply in buying those businesses.
Obviously, you can pay more for a business if you can borrow a very high percentage of the purchase price and of the future cash flow committed to it.
And you can borrow at low rates with very little in the way of restrictive covenants or anything of the sort.
Thats going to bring higher prices, and the demand for that is huge.Thats a problem for Buffett because he cares about price more than anything else.
I lost count of the number of times he made that point in his interview.
Heres one: I dont think anybody knows what the markets going to do.
I think you do know whether youre making an intelligent purchase at a given price.
And another: A stock can be a good buy or a bad buy.
A bond can be a good buy or a bad buy.
It depends on price.
And yet another: In the end, if you own good businesses at the right price, youre going to do fine.Buffetts money is where his mouth is.
Roughly 41 per cent of Berkshires stock portfolio is invested in financials, which is among the cheapest sectors.
And nearly a third is in shares of Apple Inc., which Buffett began buying in early 2016 when the stock traded at an average price-to-earnings ratio of just 10.6 during the first quarter of that year, based on 12-month trailing earnings per share, nearly half the S-P 500s average P/E ratio of 19.5 at the time.BloombergAnd lets not forget the whopping $128 billion of cash Buffett is hoarding at Berkshire.
Its not that he enjoys having all that cash around; Buffetts reason for being is to buy companies.
Ive actually been a personal net buyer of stocks ever since I was 11, Buffett recalled.
Were about 80 per cent roughly in equities and about 20 per cent in cash, and Id rather have that 20 per cent in other good businesses.So how will it all shake out? People are reaching for yield, theres no question about that, and thats stupid, and it has consequences over time, Buffett explained, adding that, It can take a lot longer than you think, but eventually you get to midnight and everything turns to pumpkins and mice.
In other words, when the money dries up or interest rates return to more normal levels for Buffett, a question of when, not if equity prices will tumble and he will have his opening.
Like all great players, there are few flaws in Buffetts game.
But perhaps more than anything else, Buffett will be remembered as the master of the fat pitch, and hes fixing for one more before he hangs up his stock charts.(This column does not necessarily reflect the opinion of economictimes.com, Bloomberg LP and its owners)