Warren Buffett or Nosteadamus? What did the Sage of Omaha know?
He sold favourite stocks such as Apple Inc (NASDAQ:AAPL, ETR:APC) and Bank of America Corp (NYSE:BAC), and finished the year by closing out positions in two index funds that track the performance of the S&P 500.
In doing so, he banked more than a third of a trillion dollars.
In short, he went long cash anticipating a period of stock market pain.
How prescient that move has turned out to be, given the turmoil created by Donald Trump, his tariffs, which threaten a global trade war and recession.
As a wheeze, I thought I would ask AI to pen an alternative shareholder letter outlining what Buffett might do with his cash.
Our 'RoboBuffett' is following closely his well-worn, commonsense investment criteria.
Put simply, his investment philosophy centres on a handful of core principles: avoid losses, invest only in businesses you understand, and prioritise long-term value.
He favours buying undervalued companies with durable competitive advantages and consistent performance.
Patience is central to his approach, as is the discipline to stay invested through market turbulence.
So, here we go...(remember, this isn't really Buffett)
Well, as you might've noticed, I've been making some adjustments recently: selling some positions and building up a rather large cash reserve of about £268 billion (roughly US$334 billion).
Some might say that’s overly cautious, but experience tells me that caution is often wise, especially when economic skies start looking cloudy.
I thought it might be useful to share three businesses I've been looking at closely lately. They each tick important boxes: strong balance sheets, straightforward operations, consistent earnings, and prices that seem to offer a comfortable margin of safety.
First, let's consider Rolls-Royce. Now, I'm not referring to the luxury cars; rather, this Rolls-Royce makes engines for aircraft and marine vessels.
Rolls-Royce Holdings PLC (LSE:RR.)
The aero-engine maker had a challenging period not long ago, particularly during the pandemic when air travel nearly came to a halt.
But management has clearly turned things around. Profits were up 55% last year, and their free cash flow increased by 88%.
What impresses me most about Rolls-Royce is how they've tackled their debt. I'm not a fan of companies burdened by heavy debts.
Rolls-Royce has managed to clean up its balance sheet significantly, even reinstating dividends and initiating a share buyback programme.
Its order book looks healthy, buoyed by increasing demand in aerospace and defence. It’s a straightforward business (engines and servicing) that's easy to understand.
Yum China
Next, I've been looking closely at Yum China, which runs KFC and Pizza Hut restaurants across China. Yum China is the dominant player in China’s fast-food market, with over 14,000 outlets.
When an economy faces a slowdown, as China is experiencing now, investors tend to get nervous. But that's precisely when businesses like Yum China can become attractive.
The company's profitability is solid, with net income margins around 7% and return on capital around 17%.
What's particularly interesting is the room for growth - only 18% of meals in China currently come from restaurant chains, compared to about 61% in the United States. Yum China's recent drop in share price creates a good opportunity to buy a strong, growing business at a reasonable price.
Harmony
Finally, there's Harmony Gold. Normally, gold mining isn't my favourite business; it tends to require significant capital and can be unpredictable.
But gold has a habit of offering stability during uncertain economic times, and Harmony Gold has caught my attention.
Harmony maintains a very conservative debt profile, with a debt-to-equity ratio of just 0.05. Earnings rose around 38% last year, with forecasts indicating nearly 19% more growth next year.
With global economic uncertainty rising, gold's role as a safe haven becomes even more compelling. Harmony is well-managed, profitable, and cautious about debt, making it an attractive way to gain exposure to gold.
The final word
Selecting these stocks involved careful consideration, assessing financial health, earnings consistency, clarity of management, and pricing.
Rolls-Royce, Yum China, and Harmony Gold are strong, well-managed businesses with clear competitive advantages. At current prices, they offer both safety and potential growth over time.
Remember, investing isn't about predicting exactly what's coming next. It's simply about preparing for uncertainty, buying good businesses at reasonable prices, and holding on patiently through market cycles.