Buffett’s Cardinal Sin: Berkshire Hathaway ‘overpaid’ for Kraft

“I was wrong in a couple of ways about Kraft Heinz,” Buffett tells CNBC. “We overpaid for Kraft.”

This says it all! If even the master of value commits to such a blunder we are in for some challenging times ahead!

Last weekend was important for any value investor and Warren Buffett fans alike. I am sure that by now you have at least read a summary of the new Berkshire’s annual letter to shareholders.

Besides his usual wit, wisdom and entertaining style of writing, we can read about his performance, his indirect criticism for Donald Trump and most importantly, his difficulty in finding a new home for his $112 billion cash position. Yes, you’ve read correctly!

What is he doing with all that money? Well, like so many other companies, he has been buying back his own shares. But that’s just a fraction of what he has still lying around in cash.

He writes: “In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects,” Buffett wrote in the letter released Saturday morning.

Well, it’s his own damn fault! 

Not only has he been steering up the interest of some deep pocket competitors (Private Equity Funds galore and some mutant venture capital funds such as the Vision Fund I and II already in the making) but that of the general public as well.

It was he who has been preaching the gospel of buying stocks no matter what – and finally, the public has caught up. It was he who has given his seal of approval for index funds investing and dollar cost averaging.

Granted, the money that has been flowing into the stock markets in recent years comes from easy money printing by central banks, but the public mood is: “Have cash? Put it in stocks at any cost!”

Why? because stocks will always go up (in the long-term) – so they believe at least in the States and in a few industrialized countries! In Japan, no one is believing that anymore, and Germans never believed in stocks anyway!

Autopilot and Stock Market Investing

Hence, millions of employed in the US and in a few other countries participate in the big game of wealth accumulation by having switched on the stock market autopilot.

What a wonderful world we live in, indeed, where anyone can get rich by simply transferring money on a monthly basis – money that goes straight into stock markets at any price – because price doesn’t matter if everything rises anyway!

This technique has even gotten a fancy name. It’s called “dollar cost averaging” by buying a fixed amount of your typical index fund ETF on a monthly basis, at any price.

This wonderful technique, that has been invented deep down in one of Wall Street’s secret laboratories, is considered “smart investing” today by most financial advisors and stock promoters.

I personally, don’t see why zombie-like behavior should be considered smart, but everyone is doing it – so it must be smart, right?!

What does Buffett’s dilemma mean for us, mere mortals?

Yes, it’s partially Buffett’s own fault that stocks markets are “sky high” today and that he can’t find anything attractive to buy these days.

Generally, you could think that this is bad news for all of us (except for those on dollar cost averaging plans, of course). However, astute students of Warren Buffet know that whenever he says something like this markets usually go into reverse as they did in 2007 and 2001 before that.

I have a feeling that he will find a new home for his cash hoard after all. And he might not even have to wait that long for it.

ASSET ALLOCATION

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