Why Warren Buffett doesn't practice what he preaches on index investing

Warren Buffett is just fine with Berkshire Hathaway's (BRK-A, BRK-B) low-yielding stash of cash and U.S. Treasury Bills. The $110.5 billion arsenal affords Buffett opportunities to pounce on juicy deals.

"We could spend $100 billion very quickly," Buffett said on Saturday at the 2019 Berkshire Hathaway annual shareholder meeting, which was exclusively live streamed on Yahoo Finance.

Buffett was responding to an investor who pointed out that if Berkshire had deployed its cash and Treasury bills in an index fund over the last 15 years (keeping a modest $20 billion cash cushion), at the end of 2018, the company's then-$112 billion position would have been worth $155 billion — an opportunity cost of more than 12% of Berkshire's book value.

Why stick with cash and government debt?

Buffett, who famously advises investors to stick with index funds, said it's a "perfectly decent question, and I wouldn't quarrel with the numbers." Referring to the 335% return in the S&P 500 since the 2009 market bottom, Buffett said, "Certainly looking back 10 years of [this] bull market, it really jumps out at you."

Buffett said his successor may choose an index fund over T-Bills. But he argued that strategy could limit Berkshire's opportunities, such as those that arose during and after the financial crisis. In September, 2008, Berkshire invested $10 billion in Goldman Sachs (GS) preferred stock, which paid a hefty 10% dividend.

Buffett also referenced Berkshire's recent $10 billion deal to buy Occidental Petroleum (OXY) preferred stock paying an 8% dividend, which is contingent upon a buyout of its competitor, Anadarko Petroleum (APC). Occidental and Chevron (CVX) are currently in a high-stakes bidding war for Anadarko.

Buffett said Berkshire's capital is much better deployed on these types of opportunistic deals, which are unpredictable and "will come in clumps, in all likelihood."

Berkshire’s Vice Chair Charlie Munger said, "I don't think it's a sin to be strong on cash when you're as big a company as we are."