Warren Buffett, the CEO of Berkshire Hathaway, has built up a record pile of cash.REUTERS/Rick Wilking
Warren Buffett has grown Berkshire Hathaway’s cash pile to more than $300 billion – an all-time high.
The famed investor has halted share buybacks and scaled back major holdings such as Apple and Bank of America.
The 94-year-old Buffett is facing a cheap drought and may be preparing to hand over control of Berkshire.
Warren Buffett has been selling stocks and stockpiling cash at a breakneck pace, fueling speculation about why the world’s top stock picker is pulling his money out of the market.
Berkshire Hathaway roughly tripled its pile of cash, government bonds and other liquid assets to a record $325 billion in the two years to September 30 (or $310 billion after subtracting almost $15 billion in debt for government bond purchases).
The conglomerate’s cash hoard now exceeds Berkshire’s total market value just over a decade ago. It accounted for at least 27% of Berkshire’s $1.15 trillion in assets at the end of the quarter – its largest share in many years.
A major reason for the rising cash pile is the lack of attractive things to buy. Buffett is a value investor who specializes in finding bargains, and they’ve become rare finds in recent years.
“I’ve heard every speculative idea imaginable, from accumulating capital for a doomsday scenario to planning a massive cash dividend,” says Lawrence Cunningham, director of the University of Delaware’s Weinberg Center on Corporate Governance and author of several books on Buffett and Berkshire, told Business Insider about the reason for the pile of money in Berkshire.
“Both seem far-fetched,” he said. “The most likely cause of Berkshire’s cash build-up is the lack of attractive capital deployment opportunities.”
Cunningham said stocks have risen to record highs, private company valuations have risen, Berkshire companies like Geico and See’s Candies can only deploy so much money, and Berkshire’s Class A shares have risen to record levels of approximately $700,000.
The total value of the U.S. stock market reached a record high of $58.13 trillion on Monday, an unprecedented 198.1% of U.S. GDP last quarter, data from Wilshire Indexes showed.
This metric is known as the ‘Buffett Indicator’ because the investor once referred to it as an excellent benchmark for valuations. Buffett said it should have been a “very strong warning sign” when the measure peaked during the dot-com bubble, and that buying shares when it approaches 200% is “playing with fire.”
The elevated level of the Wilshire 5000 makes “this stock market the most overvalued in history – even higher than at the height of the tech bubble in 2001-2002,” Paul Dietrich, chief investment strategist at B. Riley Wealth Management, told BI.
It should come as no surprise that Buffett didn’t buy back a single Berkshire share last quarter after spending $20 billion on buybacks between early 2022 and June 30 of this year — likely because he and his team no longer view their company’s stock . like a good price.
His team also split Berkshire’s stock portfolio. They sold $133 billion worth of shares in the first nine months of this year – an amount that exceeds Citigroup’s market capitalization – and bought less than $6 billion in the same period.
They cut Apple, their most valuable asset, by 60% during that period. Bank of America, their number two holding, was also cut by 23% between mid-July and early October.
Buying less and selling more resulted in a more than $140 billion increase in Berkshire’s cash hoard in the nine months to September 30.
There are other possible explanations for Berkshire’s sky-high cash pile. Buffett suggested in May that a possible increase in capital gains taxes played a role in his decision to cash in on some of his huge profits from Apple – although Donald Trump’s re-election is expected to avert a hike in the near term.
The ‘Oracle of Omaha’ now earns much more on government bonds than three years ago, when interest rates were almost zero. As of September 30, Berkshire owned $288 billion – more than the Federal Reserve.
The 94-year-old billionaire can leverage some of his winnings by winning bets like Apple to secure his legacy. He may also be cleaning out his portfolio and setting aside cash as he waits for Greg Abel, the boss of Berkshire’s non-insurance business, to succeed him as CEO.
David Kass, a finance professor at the University of Maryland who has followed Buffett for nearly four decades, suggested that the investor may be “preparing for the transition to Greg Abel and allowing him to decide how to invest those funds along with Ted Weschler and Todd. Combs,” referring to Buffett’s two investment managers.
Buffett could also be throwing away money because he sees trouble ahead.
“He has a history of selling off in the stock market when leading economic indicators, inverse Treasury yields and his famous Buffett indicator, signal a bear market or recession on the way,” Dietrich said.
Buffett could tap his cash pile to buy back Apple and other stocks he has sold at a significant discount “after the current stock market highs eventually come back down to earth,” Dietrich added.
Whether Buffett is purposefully building Noah’s Ark of rainy day funds because he expects a crash or economic collapse, or is simply priced out of the markets, he’s poised to have plenty of firepower to pick up once again downgraded stocks and companies if a recession ensues.
