How Buffett and Berkshire Hathaway Put Cash to Work in 2018

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Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) started 2018 with a massive $116 billion cash hoard and admitted it was having difficulty putting it to work. Citing a lack of attractively priced investment opportunities, CEO Warren Buffett was beginning to grow frustrated by the cash “problem” — even mentioning that a dividend could be in the company’s future if things didn’t change.

Fortunately for Berkshire and its shareholders, there has been considerable market volatility in 2018, and as a result, Buffett and his team have successfully put billions of dollars to work in the stock market. While there is still over $100 billion in cash on the balance sheet, investors are undoubtedly relieved that the stockpile has stopped growing.

With that in mind, here’s a recap of how Berkshire Hathaway put its money to work in 2018, and what the most important takeaways are for investors.

Warren Buffett smiling.

Warren Buffett has been a big spender in 2018. Image source: The Motley Fool.

How did Berkshire spend its cash in 2018?

So far, we know what the company did with its cash during the first three quarters of 2018. It hasn’t made any notable acquisitions yet this year, but there was quite a bit of stock market activity.

For the first quarter, the big story was a massive increase in the company’s Apple (NASDAQ:AAPL) stake. Berkshire’s Apple investment grew by over 74 million shares during the first quarter alone, and while we don’t know the exact price it paid, based on Apple’s share price during the quarter, Berkshire spent well over $10 billion on Apple stock during that three-month span.

In addition to Apple, it added significantly to its stakes in Teva Pharmaceuticals and Monsanto, which has since been acquired by Bayer.

The second quarter was Berkshire’s least active of the three we know about, at least from the standpoint of the amount of money invested, but there was some notable activity. In addition to another 5% increase in its Apple stake, the company added significantly to its investment in financial stocks Bank of New York Mellon and Goldman Sachs, and also invested about a billion dollars in boosting its investments in Delta Air Lines and Southwest Airlines.

Finally, Berkshire had an active third quarter in the stock market, especially with financials. It added billions to its already massive investment in Bank of America, as well as its stakes in U.S. Bancorp, Goldman Sachs, and Bank of New York Mellon. And as if that weren’t enough bank-buying, Berkshire invested about $4 billion in a new stake in JPMorgan Chase and opened a position in PNC Financial. Also in the third quarter, it notably opened a position in tech giant Oracle.

It’s also important to mention that Berkshire spent nearly $1 billion during the third quarter buying back its own Class B stock, after the company’s buyback policy was changed to make it easier for Buffett and Vice Chairman Charlie Munger to authorize the repurchase of shares.

3 key takeaways from Berkshire’s moves

To be clear, Buffett rarely discusses the specific reasons for any particular investment in the common stock of a company. Having said that, there are three key takeaways investors can gather from Berkshire’s 2018 investments:

  • Buffett loves Apple as a business. Even though the tech giant is now in bear market territory, Berkshire’s stake is still worth nearly $45 billion, making it the company’s largest stock investment by a $20 billion margin.
  • He thinks bank stocks are cheap right now. Berkshire’s investments in Wells Fargo and Bank of America are about as large as they can get without bringing regulatory headaches, and there are now eight more bank stocks in the portfolio. During the third quarter alone, it spent over $10 billion on bank stocks, and the financial sector has fallen by another 6% since the quarter’s end. So it’s fair to say that if Buffett thought bank stocks were cheap during the third quarter, he likely thinks they’re even cheaper right now.
  • Buffett thinks that Berkshire Hathaway itself is attractively priced. The revised buyback policy allows it to repurchase stock when both Buffett and Munger agree that it’s trading at a significant discount to its intrinsic value. Well, the company bought back nearly $1 billion worth at an average price of about $207, so it’s fair to assume that Buffett considers the stock cheap at this level.

The biggest moves could be happening now

As a final thought, while I would characterize the first three quarters as “active” in terms of Berkshire’s stock-buying activity, I wouldn’t be surprised if the fourth quarter turns out to be the most active of all.

The recent wave of stock market volatility started in October, after the end of the third quarter. During that time, the financial sector has dropped considerably, with many bank stocks having fallen 20% or more from their 2018 highs. Buffett favorite Apple has been an especially poor performer, down by 22% since Oct. 1, and Buffett and Munger have indicated that they’d love to own a larger stake of the tech giant.

The bottom line is that while we won’t find out what Berkshire bought or sold during the fourth quarter until mid-February 2019, the Oracle of Omaha still has a $100 billion war chest to work with, and several of his favorite stocks are on sale. Stay tuned, as this combination could make things really exciting.

Matthew Frankel, CFP owns shares of Apple, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Southwest Airlines. The Motley Fool owns shares of Delta Air Lines and Oracle and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short December 2018 $52 calls on Oracle, and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.