Frequent Fool readers will know that Warren Buffett is one of my all-time heroes. In nearly eight decades of investing, the famed American investor has built up a personal fortune of $117.5bn. Now 92, Buffett has also donated over $50bn to good causes, as part of his pledge to give away 99% of his lifetime wealth.
During his long journey through life, the so-called Sage of Omaha has made many ordinary investors very much richer. Indeed, his hometown of Omaha, Nebraska has a significant over-concentration of millionaires and even billionaires, most of whom owe their good fortune to ‘Uncle Warren’.
Warren Buffett’s Berkshire Hathaway has $147bn
In its latest quarterly earnings report, Warren Buffett’s $768bn conglomerate Berkshire Hathaway revealed that its pile of cash and short-term Treasury bills had surged to $147bn. This sum leapt by almost $17bn in just three months.
That’s more than £115bn, which is larger than the market value of all but three companies in the UK’s elite FTSE 100 index. In other words, should he wish to, Buffett could afford to buy outright any London-listed business he wanted — aided by a bit of cheap borrowing for the three biggest firms.
What would I do with this cash mountain?
What would I do if Warren Buffett asked me to invest this Mount Everest-sized mound of cash today? I’ve been thinking about this a lot this month, as I have a similar problem, but on a vastly reduced scale.
Quite simply, what I would do is apply Buffett’s own principles for value investing by using this sum to buy cheap financial assets for long-term income and growth. And one of the cheapest markets in the world right now is the humble FTSE 100.
Today, the Footsie trades on a lowly multiple of under 10.5 times earnings, producing a generous earnings yield of 9.6%. In comparison, the US S&P 500 index trades on a premium rating of 20.3 times earnings, for an earnings yield of 4.9%.
What’s more, the FTSE 100 offers a prospective dividend yield of 4.1% a year, covered over 2.3 times by earnings. On the other hand, the S&P 500’s yearly cash yield is just 1.5% (covered 3.2 times).
Why bet on the UK, rather than the US?
On multiple occasions, Warren Buffett has warned investors, “never bet against America”. So why would I go against this advice by investing in unloved UK shares? Especially when I know that the US stock market has beaten the rest of the world’s returns in 12 of the past 13 years?
I shall explain. Berkshire Hathaway has £115bn in cash, while the FTSE 100’s total value is close to £1.97trn. Thus, Buffett could buy roughly 5.8% of the Footsie with Berkshire’s cash pile.
By doing this, he would be entitled to 5.8% of all the earnings and cash dividends generated by 100 of the largest firms listed in London. And more than 70% of these earnings come from overseas, so he’d be buying global growth at a big discount to other stock markets.
In summary, like Warren Buffett, I would avoid paying premium prices for US growth stocks. Instead, I’d back the FTSE 100 for the next 10 years, which is exactly how my family portfolio is currently positioned!
