2019: Why doesn't Buffett invest Berkshire's excess cash in an index fund?

CAROL LOOMIS: “Warren, you are a big advocate of index investing, and of not trying to time the market. But by your having Berkshire hold such a large amount of cash in T-bills, it seems to me you don’t practice what you preach.

“I’m thinking that a good alternative would be for you to invest most of Berkshire’s excess cash in a well-diversified index fund until you find an attractive acquisition or buy back stocks.

“Had you done that over the past 15 years, all the time keeping the $20 billion cash cushion you want, I estimate that at the end of 2018, the company’s 112 billion balance in cash, cash equivalents, in short-term investments and T-bills, would’ve instead been worth about 155 billion.

The difference between the two figures is an opportunity cost equal to more than 12 percent of Berkshire’s current book value. What is your response to what I say?” And I forgot to say the question is from Mike Elzahr, who is with the Colony Group, located in Boca Raton, Florida.

WARREN BUFFETT: That’s a perfectly decent question, and I wouldn’t quarrel with the numbers. And I would say that that is an alternative, for example, that my successor may wish to employ. Because, on balance, I would rather own an index fund than carry Treasury bills.

I would say that if we’d instituted that policy in 2007 or ’08, we might have been in a different position in terms of our ability to move late in 2008 or 2009.

So, it has certain — it has certain execution problems with hundreds of billions of dollars than it does if you were having a similar policy with a billion or 2 billion or something of the sort.

But it’s a perfectly rational observation. And certainly, looking back on ten years of a bull market, it really jumps out at you.

But I would argue that if you were working with smaller numbers, it would make a lot of sense. And if you’re working with large numbers, it might well make sense in the future at Berkshire to operate that way.

You know, we committed 10 billion a week ago. And there are conditions under which— and they’re not remote, they’re not likely in any given week or month or year — but there are conditions under which we could spend a hundred billion dollars very, very quickly.

And if we did — if those conditions existed — it would be capital very well deployed, and much better than in an index fund.

So, we’ve been — we’re operating on the basis that we will get chances to deploy capital. They will come in clumps in all likelihood. And they will come when other people don’t want to allocate capital.

Charlie, what do you think about it?

CHARLIE MUNGER: Well, I plead guilty to being a little more conservative with the cash than other people. But I think that’s all right.

We could have put all the money into a lot of securities that would’ve done better than the S&P with 20/20 hindsight. Remember, we had all that extra cash all that period, if something had come along in the way of opportunities and so on.

I don’t think it’s a sin to be a little strong on cash when you’re as a big a company as we are. We don’t have to —

I watched Harvard use the last ounce of their cash, including all their prepaid tuition from the parents, and plunge it into the market at exactly the wrong moment and make a lot of forward commitments to private equity. And they suffered, like, two or three years of absolute agony. We don’t want to be like Harvard.

WARREN BUFFETT: Plus timber and a whole bunch of —

CHARLIE MUNGER: What?

WARREN BUFFETT: Plus timber. And I mean —

CHARLIE MUNGER: Yeah, yeah. We’re not going to change. (Laughter and applause)

WARREN BUFFETT: We do like having a lot of money to be able to operate very fast and very big. And we know — and maybe we won’t — we know we won’t get those opportunities frequently.

I don’t think — certainly, you know, in the next 20 or 30 years there’ll be two or three times when it’ll be raining gold and all you have to do is go outside. But we don’t know when they will happen. And we have a lot of money to commit.

And I would say that if you told me I had to either carry short-term Treasury bills or have index funds and just let that money be invested in America generally, I would take the index funds.

But we still have hopes. And the one thing you should very definitely understand about Berkshire is that we run the business in a way that we think is consistent with serving shareholders who have virtually all of their net worth in Berkshire. I happen to be in that position myself, but I would do it that way under any circumstances.

We have a lot of people who trust us, who really have disproportionate amounts of Berkshire compared to their net worth, if you were to follow standard investment procedures.

And we want to make money for everybody, but we want to make very, very sure that we don’t lose permanently money for anybody that buys our stock somewhere around intrinsic business value to begin with.

We just have an aversion to having a million-plus shareholders, maybe as many as two million, and having a lot of them ever really lose money, if they’re willing to stay with us for a while.

And we know how people behave when the world, generally, is upset. And they want to be with something — I think they want to be with something they feel is like the Rock of Gibraltar. And we have a real disposition toward that group.