Buffett’s $109+ Billion Dollar Investment

Buffett’s $109+ Billion Dollar Investment By Tekoa Da Silva for Sprott Media

Berkshire Hathaway Inc., chaired by Warren E. Buffett, recently published its 2018 annual report. A consistent feature of many years has been Berkshire’s sizeable position in cash and cash equivalents, which now exceeds $100 billion.

A recent change in Berkshire’s balance sheet is the addition of a row under current assets, labeled “Short-Term Investments in U.S. Treasury Bills.” Throughout the report we also see language indicating “maturities of three months or less.”

It appears, in recent years, that Berkshire Hathaway has been rotating ever larger amounts of cash into 3 Month U.S. Treasury Bills (or those of similar duration).

The reason is simple: In most cases, 3 Month U.S. Treasury Bills pay more than similar alternatives — and much more in some cases.

CENTRAL BANK INTEREST RATE HIKES

In December 2016, the Federal Reserve Bank began increasing short-term interest rates (called the Federal Funds Rate) at an increased pace. This coincided with a change in presidential administration.

(Source: St. Louis Federal Reserve, “Federal Funds Rate”)

Prior to this policy change, the Federal Funds Rate was near zero for almost 10 years. During that period (an extension of bank-industry bailouts), U.S. savers became accustomed to earning next to nothing on their savings. Saving and checking account deposit rates were generally below 0.08% per annum.

As the Federal Reserve Bank exercised its monopoly privilege on increasing the cost of money, the corresponding yields on short-term U.S. Treasury Bills moved higher as well. Today, 3 Month Treasury Bills, which once returned 0.02%, yield about 2.40% annually.

THE NECESSITY OF CASH

Most investors (and diligent people) maintain cash positions in their portfolios and in their personal lives. Cash is useful in dealing with life’s emergencies and enabling opportunistic buying in the market. Now those same cash positions can produce income as well.

BankRate.com publishes data on deposit rates nationwide. As of May 24, 2019, BankRate’s benchmark averages are:

  • 1 Yr. CD: 0.88%
  • 2 Yr. CD: 0.94%
  • 5 Yr. CD: 1.44%
  • Savings Account: 0.10%
  • Money Market Account: 0.21%
  • Checking Account: 0.08%

COLLECT RENT ON YOUR MONEY

These rates tell us that, although the Fed Funds Rates and U.S. Treasury Rates have increased, savings institutions have not passed along those higher yields to their customers. This signals an opportunity to shift capital away from banks (who don’t pay ‘rent’ on your money) to higher-yielding products, such as short-term U.S. Treasuries.

Annual yields on U.S. Short-Term Treasuries are (as of May 23, 2019):

  • 1 Month: 2.38%
  • 3 Month: 2.37%
  • 6 Month: 2.40%
  • 1 Year: 2.32%
  • 2 Year: 2.12%
  • 5 Year: 2.11%

According to BankRate.com’s market data, 3 Month U.S. Treasury Bills yield approximately 24 times more annually than the average savings account.

Hence, it makes sense for Berkshire Hathaway to shift mountains of cash to short-term U.S. Treasury Bills.

Life and investing both call for mandatory ‘cash’ positions, and it makes sense to be paid ‘rent’ on our money.

Fortunately, the process of purchasing U.S. Treasuries is simple — if you’d like to receive a complimentary copy of the white paper How To Earn More On Your Savings Deposits please click here (pdf) or reply to the author.

Sharing is caring!