Amidst scrutiny over Warren Buffett’s record-breaking $157.2 billion cash reserve, analysts are divided over its implications. Some view it as a sign of an impending global recession, harkening back to the financial crisis, or as a loss of Buffett’s investment prowess. However, this stash is consistent with his customary cautious approach, forming around 15.4% of Berkshire Hathaway’s total assets. Buffettâs historically successful strategy revolves around patience, awaiting opportune moments to invest, particularly in high-quality brands at attractive prices. The high valuation of the market and low yields in volatile equities suggest Buffett may not find ample investment opportunities currently, further reinforcing his ongoing conservative stance.
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Buffettâs $157 Billion Cash Pile Isnât an Ominous Sign: Jonathan Levin
By Jonathan Levin
Everything in the world is relative, including Warren Buffettâs cash position.Â
After Berkshire Hathaway Inc.âs third-quarter report on Saturday, investors and commentators made a lot of noise over the fact that Buffettâs cash hoard had ballooned to a new record of $157.2 billion, most of it in Treasury bills. For some, the development was a sign from the Oracle of Omaha himself that a global recession was nigh, with echoes of his cash hoarding before the financial crisis. For others, it suggested that the eminent 93-year-old investor had lost his knack for finding deals. In reality, itâs just Buffett being Buffett, exhibiting his usual restraint in a market without many bargains.
First, consider the cash pile itself. While Berkshireâs position in T-bills has indeed grown, so too has the rest of its portfolio. At about 15.4% of total assets, cash and equivalents are just a hair above their 20-year average. The out-of-context focus on the ârecordâ makes the situation sound much more extreme than it is. Todayâs cash-to-assets ratio pales in comparison to the levels that prevailed before the financial crisis, which allowed Buffett to opportunistically scoop up legendary investments involving Goldman Sachs Group Inc., General Electric Co. and Dow Chemical Co.
Nowadays, Berkshire hardly looks like a firm thatâs bracing for Armageddon. In fact, it still has significantly more exposure to two consumer products companies (Apple Inc. and the Coca-Cola Co.) than it does to Treasury bills. Thatâs clearly not how Iâd structure my portfolio if I had foreknowledge of a looming market implosion.
Second, recall that Buffettâs special sauce is his patience. He and his 99-year-old partner Charlie Munger made their fortunes by holding a lot of cash (sometimes a bit more, sometimes a bit less) and waiting for the chance to invest in high-quality brands at attractive prices. Occasionally, theyâve made lower-quality investments, too, albeit at very attractive prices, but the key has always been in maintaining self-restraint and the financial cushion to hold out for the right deals to come to them. Thatâs why itâs almost funny to see the periodic handwringing about the amount of cash on the balance sheet; itâs a cornerstone of their famous and often-emulated investment strategy.
Itâs hard to see where Berkshire deals would come from today, however. In a now famous 2001 essay for Fortune Magazine, Buffett pointed out the ratio of total stock market value to the economyâs nominal value as an early indicator of overvaluation during the dot-com bubble. The so-called Buffett indicator is running well above its historic average (although itâs retreated significantly from its peak in late 2021.) Whatâs more, for the first time in more than 20 years, the trailing earnings yield on the S&P 500 Index is lower than the 3-month Treasury bill â an obvious sign that the risk-reward isnât great in volatile equities.
Some doomsayers think the popular Buffett indicator and earnings yields relative to T-bills are warning us of an ongoing bubble that still needs to burst. Given the many pandemic distortions in the US economy and markets, Iâm not so sure I read them in such a dire way â and I donât think Buffett does either, though I havenât had the chance to ask him. One thingâs for sure: These metrics arenât signs that itâs time for investors to feast on deals. While some troubled assets (think: the KBW Regional Banking Index) have cheapened, itâs hardly clear that theyâre trading at fire-sale prices given the underlying vulnerabilities.
The conventional wisdom is that the longer Berkshire waits, the more the pressure grows to deploy that money â but Iâd beg to differ. Even in lower interest rate environments, Buffett and Munger have proved they were willing to be patient, so the two should be more than happy to take their time with T-bills paying over 5% and with a whole lot less to prove to the world.
Hereâs how Buffett put it at this yearâs Berkshire shareholder meeting in May:
…the world is overwhelmingly short-term focused. And if you go to an investor relations call, theyâre all trying to figure out how to fill out a sheet to show the earnings for the year. And the management is interested in feeding them expectations, so weâll slightly be beaten.
I mean, that is a world thatâs made to order for anybody thatâs trying to think about what you do that should work over five, or ten, or 20 years. And I just think that I would love to be born today, and go out with not too much money, and hopefully turn it into a lot of money. And Charlie would too, actually.
Hereâs the long and the short of it: Thereâs no need to over interpret the modest growth of Berkshireâs cash balance, which exhibits about the same degree of caution that Buffett has brought to the company for the entire 21st century. Not even Buffett knows where the economy is heading, but he knows a lackluster value proposition when he sees one. So itâs pointless to spend down that money in a market with few fat pitches.
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