Here's the most under-asked question of the year so far: If Warren Buffett (search) isn't putting Berkshire Hathaway's money in stocks, can this be a good time for anyone else to do it?
Since 1965, Buffet has delivered an average annual gain of 21.9 percent (which averages 11.5 points more than the S&P 500's average annual 10.4 percent gain over the same period). With a track record like that, most investors should want to learn why today is different enough to keep Buffett on the sidelines.
In his letter to shareholders for the Berkshire Hathaway (search) 2004 annual report, he describes why the company is holding cash now:
"What Charlie [Munger, vice chairman] and I would like is a little action now. We don't enjoy sitting on $43 billion of cash equivalents that are earning paltry returns. Instead, we yearn to buy more fractional interests similar to those we now own or — better still — more large businesses outright. We will do either, however, only when purchases can be made at prices that offer us the prospect of a reasonable return on our investment."
In other words, Buffett thinks that stocks and the businesses his company might buy are tremendously overvalued. That's another way of saying the markets are pumped up, like a baseball player on steroids, even though they (players and the markets) don't want to admit it.
In fact, Buffett uses baseball imagery throughout his shareholder letter. When he writes about how Berkshire Hathaway's operating companies sent excess cash to company headquarters in Omaha, Neb., for him to deploy, he steps up to the plate and makes a public mea culpa:
"I didn't do that job very well last year. My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have. But I struck out. Additionally, I found very few attractive securities to buy. ..."
In an odd parallel, it turns out that Buffett isn't the only big-time player sitting on cash. According to the most recent Outlook newsletter from Standard & Poor's, most of the companies in the S&P 500 (search) have been holding out on investors, too, by not paying out their usual percentage of dividends.
In a recent column, Mark Hulbert quotes from the S&P newsletter: "Companies in the S&P 500 are still sitting on a mountain of cash. We estimate that non-financial corporations in the index currently have about $602 billion in cash and cash equivalents on their balance sheets."
Let's see ... since Berkshire Hathaway isn't included in the S&P 500 index, we know that we can add another $43 billion to that $602-billion figure to get up to a minimum of $645 billion in cash that U.S. companies are sitting on. And the reason they have so much cash, according to S&P, is that S&P 500 companies are paying out only 32 percent of their earnings as dividends. That compares with a long-term average of 54 percent.
So, even if investors do buy an S&P 500 stock, they won't get the normal share of earnings back in their quarterly dividend checks. That partially explains why the current yield for the Dow Industrials at 2.3 percent (again, according to S&P) is still below the traditional 3-6 percent range of yields.
So, let's ask the question again: If Warren Buffett is holding cash, and if corporations are holding cash rather than paying dividends, what's a little old everyday investor supposed to do? Repeat after me: Hold onto your cash. Unless you want to watch your portfolio follow the market as it ... well, to put it delicately, as it becomes less overvalued.
Notice that Buffett is not investing in real estate, an all-too-tempting alternative for regular folks who have some money they would like to invest but who don't trust the stock markets. In fact, as the most recent issue of The Elliott Wave Financial Forecast points out, many people are "now captivated by the concept of easy wealth through real estate. … According to the National Association of Realtors, a stunning 25 percent of the 7.7 million homes sold in 2004 were purchased strictly as investments."
In the United States, though, even as investors in certain locales continue to flip homes at higher prices, some important indicators made telling turnarounds in January. Total U.S. home sales dropped dramatically by 9.7 percent from December 2004 to January 2005 (before revisions), even as median sales prices on new U.S. homes plunged 13% from $229,700 to $199,400. That decline in the median sales price is the largest one-month fall in the history of the data, which goes back to 1963. So it looks like the real estate market may not provide a safe place to run to in the future.
Back to one final baseball analogy from Buffett. While writing about performance for the year, Buffett describes the CEO of one of their insurance companies as a superstar: "His slugging percentage is right up there with Barry Bonds' because, like Barry, [he] will accept a walk rather than swing at a bad pitch."
Bonds may not be swinging for the bleachers this year due to injuries, but the Oracle of Omaha's lesson is still useful: Know when to swing at the markets and know when to lay off and take the intentional walk.
Susan C. Walker writes for Elliott Wave International, a financial analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She received her B.A. in Classics from Stanford University.