Berkshire has taken a "barbell" approach to using ** and cash.
Warren Buffett doesn't like the bond market.
While every professional fixed income investor and strategist seems to be recommending buying bonds, Warren Buffett is not buying it.
The portfolio underpinning Berkshire Hathaway's vast insurance business is heavily skewed towards ** and cash. The company's bond portfolio is insignificant in comparison. Insurance companies use the premium income to invest and receive a return on those investments before paying any claims.
Berkshire's portfolio is a far cry from almost all major property and casualty insurers. Large insurers such as Chubb and Tr**Elers keep most of their assets on bonds, as insurance regulators and credit rating agencies actually need to do the same.
Warren Buffett has taken a completely different approach. At the end of 2023, Berkshire held more than $360 billion in cash, $67 billion in cash (mostly Treasuries) and just $24 billion in bonds. Almost all of these investments are held by its insurance division. In addition, fixed income portfolios are effectively like cash, with $19 billion maturing in a year or less, and bond portfolios also losing about $1 billion in 2023.
About half of the bond portfolio is international**, which is believed to be a result of Berkshire's regulations on overseas insurance business.
Compare Berkshire's portfolio to that of Chubb, one of the largest property and casualty insurers. At the end of 2023, about 80% of Chubb's $136 billion portfolio was invested in bonds.
Berkshire, for its part, has taken a "barbell" approach to the use of ** and cash, as Buffett is not obsessed with bonds, and has been for more than a decade, even as bond yields have been rising since 2022.
Buffett was right to criticize bonds in 2020 when the yield on 10-year Treasuries was less than 1%, saying that investors were actually paying more than 100 times the yield for an asset that had no hope of higher income.
At Berkshire's 2022 shareholder meeting, Buffett spoke about Advance Insurance, a leading auto insurer, and how Peter Lewis, the former CEO of Advance Insurance and a decades-long development planner, was creative in underwriting, but emphasized bonds like other insurers when it came to investing.
At the 2022 annual meeting, Warren Buffett said: "Probably everybody in the insurance industry will say, we have bonds, because that's what people do."
Berkshire has been able to take on higher risk in its portfolio, emphasizing** – which is very beneficial to it – because it maintains a large insurance surplus, known as a buffer of assets. The ratio of the company's annual premiums to surplus is only a fraction of that of its peers.
In addition, Berkshire maintains a large cash position (most of which is in its insurance business unit) and as an alternative to bonds, Buffett can invest a large portion of this cash in bonds, but apparently he is not interested in it.
His approach contrasts sharply with the view of bond experts, who believe that investors should hold less cash and more bonds, as short-term interest rates are moving lower and bonds are valuable against the backdrop of 3% inflation and still falling. Bonds** and yields move in opposite directions.
The bond market typically includes U.S. Treasuries with yields of around 4%, investment-grade corporate bonds with yields of 5% or more, and junk bonds with yields in the 7% to 8% range.
But Buffett wants Berkshire's Treasury yields to exceed 5%. He has said he likes to come to the office on Mondays, when he can reinvest (or roll) the proceeds of maturing Treasuries in the weekly auction of new Treasuries. Treasury bill rates are likely to move lower in 2024 and 2025, but they are still likely to reach 4% next year.
Measured by key indices, bonds have been up about 2% so far this year, so Buffett's strategy looks pretty good in 2024.
Personally, Buffett doesn't like bonds either. About 99 percent of his wealth is invested in Berkshire Hathaway. These stakes are now worth about $130 billion.
Since March 11, 1942 (the date of my first purchase), I can't recall a time when my net worth wasn't dominated by the U.S.," Buffett, now 93, wrote in his just-released shareholder letter.
Buffett's approach to Berkshire and his own investments is in stark contrast to the standard mix of ** and Bond 60 40. There's nothing wrong with that.
However, investors can follow Buffett's example and use a barbell to hold ** and cash, depending on the investor's risk tolerance for **. With the current interest rate on Treasury bonds at 5%, investors are not going to give up too much for cash. It's a strategy worth considering.
Wen Andrew Barry
Edited by Yu Zhou
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