Every quarter - March, June, September, and December - I've shared my pension portfolio and investment insights with you. However, it seems this might be the last year for this type of content. The level of interest hasn't been as high as I anticipated, so I'm planning to rethink my content strategy.
Nevertheless, today, I'd like to summon the wisdom of the Oracle of Omaha, a figure I deeply admire, to share some thoughts on investing.
Berkshire Hathaway's second-quarter earnings report revealed a significant shift in its portfolio. The company has been aggressively selling off stocks like Apple and Bank of America, opting instead to amass a massive hoard of short-term U.S Treasury bills (T-bills) with maturities of less than a year. The scale of this move is staggering: Berkshire's holdings in short-term securities have ballooned to a jaw-dropping $234.6 billion. This figure dwarfs even the U.S Federal Reserve's holdings of $195.3 billion, exceeding them by a hefty $40 billion. According to JPMorgan, Berkshire's T-bill holdings are estimated to account for roughly 3% of all outstanding Treasury securities.
Buffett's decision to dump stocks and stockpile cash has sparked considerable buzz, with many investors interpreting it as a sign that he's bracing for an economic downturn. However, as Buffett has consistently reiterated, he doesn't attempt to predict macroeconomic trends. What he does do, though, is maintain a certain level of cash as part of his overall asset allocation strategy.
Conventional wisdom often labels cash and cash equivalents like bank deposits and money market funds as the "safest" assets. If we measure risk solely in terms of price volatility or "beta", this might be true. However, holding these assets for extended periods can be incredibly "risky". Historically, individuals in almost every country have been their purchasing power erode over time, even if they consistently received principal and interest payments on their cash holdings. This is precisely how Buffett views cash as an asset. He has stated that since taking the helm at Berkshire in 1965, a tax-exempt institution would have needed to earn an annual interest rate of 4.6% on bond investments just to maintain its purchasing power over that period. In other words, an after-tax return of 4.6% per year isn't considered a profit; it's merely a means of preserving purchasing power. This explains why it's virtually impossible for taxable investors to maintain their purchasing power solely through bonds or bank deposits. Holding U.S. short-term Treasuries from 1965 to 2012 would have yielded an annual return of 5.7%, which seems decent at first glance. However, after factoring in the average individual investor's income tax rate of 25%, the actual return drops to 4.3%. This means that investors would have effectively lost purchasing power each year during that period. Buffett, therefore, sees cash as a highly "risky" asset when held for the long term.
So, why is Buffett amassing such a large cash position? For him, cash represents readily available liquidity. While there might not be any attractive investment opportunities at the moment, having cash on hand allows him to act decisively when the right opportunity arises. Charlie Munger, Buffett's longtime partner, compares investing to baseball. In baseball, you have to swing the bat at least once before striking out. In investing, however, there's no such obligation. You don't have to invest just because you have cash. Instead, you can wait patiently until you've done your homework and are confident about the timing before taking a swing. There are no strikeouts in the investing world. Buffett's substantial cash holdings simply indicate that he hasn't found anything worth investing it yet. Or perhaps he's made some moves in the third quarter that aren't reflected in the second-quarter report.
While we can certainly learn from Warren Buffett's investment philosophy, there's no need to panic just because he's holding a lot of cash. We can apply this lesson to our own portfolios by keeping 10-20% of our total assets in cash when attractive investment opportunities are scarce.
The stock market is like Mr. Market, a character often reference by Buffett. It's generally an efficient market, but prices can sometimes overshoot or become undervalued due to investor sentiment. Cash allows you to seize those moments when your favored assets become cheap.
With that said, let's shift our focus from Buffett's cash position to my own pension investment portfolio and delve deeper into my investment thoughts.
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In my previous quarterly update, I disclosed a pension portfolio allocation that included 15.72% cash and 13.76% in a mix of short and long-term U.S. Treasuries.
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As of Sep 1, 2024
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Now, let's take a look at my portfolio as of Sep 1st. I've trimmed some of my cash and bond holdings to increase my exposure to semiconductor stocks during this recent market dip. While there's growing apprehension about a potential recession and the bursting of the AI bubble, I remain optimistic about the long-term growth prospects of artificial intelligence. However, after adding to my semiconductor positions, I realized that I might be overly concentrated in this sector, which serves as the infrastructure for AI. To mitigate risk, I'm contemplating rebalancing my portfolio. While I'm still bullish on semiconductors, I believe it's prudent to diversify my holdings. I'm considering allocating some funds to the KOSPI 200 and NASDAQ 100 indices. Ideally, I'd prefer to invest in individual software companies poised to benefit from AI, but my pension account restricts me to ETFs, hence the focus on index-based products.
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Source: KRX
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Currently, the KOSPI 200 is trading at a price-to-book ratio(PBR) of 0.92, indicating that it's undervalued relative to its book value. Given the Korean stock market's characteristically low return on equity (ROE), it's challenging for stocks to be valued at their book value. However, from a trading perspective, a PBR of 0.92 suggests a degree of undervaluation, considering the market's profitability. Of course, the KOSPI has been known to dip even lower, so I intend to accumulate shares gradually through dollar-cost averaging.
As for the NASDAQ 100, I believe the AI boom is still in its early stages. It's true that major tech companies like Microsoft, Google, Amazon, Meta, and Tesla have been pouring massive amounts of capital expenditure (CAPEX) into AI infrastructure. However, these investments have only been underway for a couple of years. The derivative industries spawned by AI are just starting to emerge, and the tech giants still have ample cash reserves. While comparison to dot-com bubble are frequent, it's important to remember that back then, companies with no profits saw their stock prices soar simply by adding ".com" to their names. Today, the CAPEX concerns primarily revolve around profitable big tech companies. I believe these investments will continue for several more years, and only then, if no clear path to profitability emerges, will the market express genuine concern. I see this current market dip as a buying opportunity, particularly for the NASDAQ 100 or ETFs focused on AI-related software companies.
Finally, I'll wrap up this post by sharing my year-to-date pension returns. Thanks to a significantly rally in Korean semiconductor stocks, my portfolio was up over 13% by the end of the second quarter. However, a substantial pullback in these stocks has erased a considerable portion of those gains. My return still lag behind the S&P500 by a wide margin.
Looking at the cumulative returns from 2020 to the third quarter of 2024, the performance appears more respectable. While it trails the NASDAQ 100, I'm striving for superior long-term returns. My ultimate goal is to outperform the S&P500 over an extended period. Given the lackluster performance this year, I'm committed to continuous improvement.
Please note that my investment strategy reflect my personal views and should be considered for information purposes only. All investment decisions carry inherent risks, and the responsibility for those decisions rests solely with the individual investor.
Thank you for reading.
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