Berkshire Hathaway’s cash level has hit an unprecedented $325 billion – a staggering amount for a company whose primary purpose is investing in stocks.
This has sparked widespread speculation that Buffett sees an incoming market decline and is hoarding cash in preparation.
But is this really the case?
First, let’s look at Berkshire’s track record.
Over the last 30 years, Berkshire Hathaway has returned about 2,100%, significantly outperforming the S&P 500’s 800% return.
Buffett’s decisions have consistently outperformed the broader market.
This is an achievement that 85% of professional money managers fail to achieve.
The Evolution of Berkshire’s Cash
Since 2012, Berkshire’s cash pile has consistently reached new highs almost every quarter, except in 2022 when Buffett deployed some capital into stocks.
However, Berkshire itself has grown enormously through the years.
From a $50 billion market cap in 1997, it’s now worth $1 trillion.
So, to make sense of Buffett’s cash strategy, we need to analyze cash as a percentage of Berkshire’s total assets.
In percentage terms, cash now represents about 30% of holdings – the highest allocation since the 1990s.
In fact, Berkshire has never been this under-invested in the stock market
This suggests Buffett finds today’s market less than attractive.
Does this mean that Buffett is expecting a downturn soon?
Well, the last time Buffett maintained such elevated cash levels was between 2004 and 2007, when allocations consistently exceeded 20%.
While many point to this as evidence he foresaw the 2008 crisis, the timing doesn’t support this.
His maximum cash position occurred in December 2004, 3 full years before the financial crisis.
Moreover, he actually reduced cash holdings in 2005 and 2006, well before the 2008 recession.
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The Real Reason Behind the Cash
So why is Buffett building such a large cash pile now?
The explanation lies in Buffett’s investing philosophy from “The Intelligent Investor.”
His approach isn’t about timing markets but about valuation.
Today’s market valuations make a compelling case for caution.
The S&P 500’s PE ratio sits at levels seen only briefly in 2021 and 1999, making it among the most expensive markets in 40 years.
This valuation concern extends across virtually every sector of the economy:
Financial stocks show historically high valuations, while industrial and material stocks have reached price levels seen only a handful of times in the past 30 years.
This widespread overvaluation leaves few opportunities for Buffett’s strategy of buying great businesses at cheap prices.
The Cash Yield Factor
Current cash yields, however, hover near 30-year highs, making it an attractive alternative to stocks.
So, in an environment where stocks are overpriced, holding cash becomes a smart strategy from Buffett’s point of view.
The spread between S&P 500 earnings yield and cash yields has turned negative – an occurrence only seen 8 times in 60 years.
Most of these instances marked significant market peaks, including the 1987 Black Monday crash.
This is simply because a high cash yield means that investors are less likely to allocate capital to a low yielding stock market.
So, it naturally leaves the market more vulnerable to seeing a large drop.
Today’s Market
So, why hasn’t the market peaked yet?
The late 1990s offer a clue.
Back then, stocks were expensive, and cash yields were attractive, yet the Dot Com bubble lasted for years.
It wasn’t until the 2001 recession that markets corrected significantly and triggered a decade of stock market underperformance.
For long-term investors like Buffett, the focus isn’t on predicting recessions but positioning for future opportunities.
By holding cash now, he ensures he can deploy capital effectively when valuations improve, regardless of market timing.
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