Warren Buffett's Biggest Secret: Cash on Hand at the Right Time

NEW YORK (TheStreet) -- Yes, Berkshire Hathaway (BRK.A) (BRK.B) underperformed the S&P 500 for the trailing 12-month period. But Warren Buffett and Charlie Munger's underperformance is likely to be temporary.

Just wait for this roaring market to turn. Buffett's investment picks tend to perform better as a result of dollar-cost averaging through a bear market.

According to Buffett:

"We will always maintain supreme financial strength, operating with at least $20 billion of cash equivalents and never incurring material amounts of short-term obligations. As we view these and other strengths, Charlie and I like your company's prospects. We feel fortunate to be entrusted with its management."

Berkshire Hathaway didn't outperform the stock market this past year because the company tends to keep cash safely tucked away for more favorable opportunities. Being conservative in an environment of rising equity valuation may sound somewhat foolish, but it has been proven time and time again that in a down market, excess cash buys the opportunity to buy companies at fire-sale prices.

Every value investor -- or investor attempting to become a value investor -- needs to understand Warren Buffett's key principle of having cash on hand for better opportunities. It is Buffett's most underrated trait.

Buffett goes onto say in his 2008 letter to shareholders:

"I have pledged -- to you, the rating agencies and myself -- to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits."

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