This is a new worrying sign for ASX investors that are heavily overexposed to shares. High profile investor Warren Buffett has been a net seller of shares and is sitting on a record pile of cash, which earns next to nothing.
But the lack of returns from cash isn't dissuading Buffett's Berkshire Hathaway Inc. from selling US$1 billion more shares than it bought in the June quarter, which represents the biggest gap since the end of 2017, according to Bloomberg.
The move will cost him given that the S&P 500 and other key US stock benchmarks have hit a record high in recent months. Adding insult to injury, Berkshire's cash hoard that ballooned to US$122 billion is earning the firm very little.
Investors stuck between a rock and a hard place
ASX investors are facing a similar dilemma as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and All Ordinaries (Index:^AORD) (ASX:XAO) indexes have also recently pushed above their previous record high set in 2007 – lead by the Magellan Financial Group Ltd (ASX: MFG) share price, WiseTech Global Ltd (ASX: WTC) share price and Fortescue Metals Group Limited (ASX: FMG) share price.
We are in an environment where disciplined fundamental investors are getting punished. The earnings environment does not support current stock valuations and it's the ultra-low interest rates that are pushing shares to the sky.
It's the "least dirty shirt" investment strategy. Investors know equities are getting stretched, but they don't have a better option.
One of the most difficult challenges for any investor
One of the things I've learned from my time investing and trading shares is that waiting is the hardest thing to do – especially when there's an opportunity cost.
You can almost hear the same frustration in Buffett's update. He wants to deploy cash to make a meaningful acquisition but he feels insulted to pay such a premium.
What's also telling is that Berkshire has also not been stepping up its efforts to buy its own stock. That's probably because it's probably scoffing at the price it needs to cough up.
Foolish takeaway
There are a few takeaways from Buffett's update that is relevant to ASX investors. The first is not to give in to FOMO (fear of missing out). I think sitting on cash as we head into the reporting season is the smart thing to do as you will have the ammunition to make selective purchases (and I am sure there will be a few this month).
The second is that share buybacks – a popular strategy of cashed-up ASX companies to return capital to shareholders – may not be a smart move. There's a saying that companies have a tendency to buy their own shares at the peak of the market and do a cap raise at the bottom – unless of course management is smarter than most.
The third takeaway is that there are real signs the US economy is hurting from the trade war despite what its President Donald Trump is saying.
The companies that Berkshire is invested in are often seen as the canary in the proverbial mine for the US economy, and several of them, including railroads and an industrial products manufacturer, are going backwards.
