In his recent television appearance, legendary investor Warren Buffett reiterated the statement he mentioned many times in his letter to Berkshire Hathaway investors: borrowing money to buy shares is crazy.
It is unlikely that there will be many who will argue with the fidelity of this statement, but in reality things are not at all what they seem.
The fact is that it is these investors who are engaged. Not only has the so-called leverage been growing steadily over the long term, corporations have also actively issued bonds to finance stock repurchase operations.
According to a report on capital flows prepared by the Federal Reserve, non-financial corporations have become net purchasers of US stocks worth $ 3.9 trillion since 2009.
In contrast, households, insurers and pension funds turned out to be net sellers worth $ 672 billion and $ 1.2 trillion, respectively, over the same period of time, while mutual funds and ETFs bought shares of American companies for $ 1.6 trillion.
It would be okay if companies sent money to buyback their profits, but that is not so. As mentioned above, almost all the money was borrowed.
It is worth noting that all this debt feast continued while rates were very low, but now this period seems to be ending.
Buffett warns that the consequences may not be the most pleasant, and gives an eloquent phrase to describe the current situation: "You never know who is swimming naked until the tide is gone." Buffett himself and his companies have made virtually no investments over the past year, because, in his opinion, current asset prices are too high and cannot be interesting.
This is what Buffett wrote in his annual address to investors.
"In our search for new independent enterprises, the key qualities that we strive for are strong competitive advantages, skillful and high-quality management, good profitability of the net tangible assets necessary for doing business, opportunities for internal growth while maintaining attractive profitability and, finally, a reasonable price purchases.
This last requirement turned out to be an obstacle for almost all deals that we considered in 2017, since prices for decent, but not at all impressive businesses reached a record level. "
We also add that an incredible amount of cash has accumulated on the balance sheet of Buffett's Berkshire Hathaway: $ 116 billion.The investor simply does not know where to invest it, although this money would be enough to buy a lot of American corporations, including Nike, Starbucks, UPS, Netflix and Ford.