Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 15. Why Hold Cash: Liquidity Brings Opportunities

[K]eep in mind that most of the value of our convertible preferreds is derived from their fixed-income characteristics. That means the securities cannot be worth less than the value they would possess as non-convertible preferreds and may be worth more because of their conversion options.^[137]

—Warren Buffett

To preserve principal and possibly invest in more profitable opportunities later, Buffett keeps a significant portion of Berkshire's total assets in cash, short-term government securities, and preferred stock. Even in adverse situations, these investments generally safeguard the value of the principal amount. At the end of 2008, Berkshire had $24 billion in cash or cash equivalents, or 12 percent of total assets, in its insurance businesses. It had an additional $27 billion in fixed-maturity securities, about half of which are in government securities.

Liquidity and Opportunities

Beyond safety, there are at least two reasons why Berkshire maintains a large amount of cash and short-term securities. First, Berkshire can invest large sums of money quickly whenever a good investment opportunity arises. An opportunity arose in 2002 when Dynegy needed to sell its 16,600-mile pipeline—the Northern Natural Gas Company—to Berkshire for $928 million, a steep discount on the $1.5 billion that Dynegy had paid only a few months earlier. In many other cases, such as buying an 80 percent stake in Iscar for $4 billion in 2006, Berkshire ...