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Why Warren Buffett’s Record Stack of $189 Billion in Cash Isn’t the Market Crash Signal Some Say

Warren BuffettScott Morgan/Reuters

  • Berkshire Hathaway has a record stack of $189 billion.

  • According to a fund manager, that is no reason to worry about an impending stock market crash.

  • “Everyone’s moving, they’re being hyperbolic about it, but it’s not that big a number,” Chris Bloomstran said.

Berkshire Hathaway recently reported its first-quarter results, and like clockwork, a swarm of bearish investors pointed out that Warren Buffett is sitting on a record $189 billion in cash.

The implication, according to these commentators, is that the stock market is likely to suffer a massive decline soon because Buffett sees no value in investing his company’s massive cash pile at today’s sky-high valuations.

That couldn’t be further from the truth, said Chris Bloomstran, fund manager at Semper Augustus, which manages about $550 million in assets and counts Berkshire Hathaway as its largest position.

In a recent interview with Business Insider, Bloomstran explained that there is a lot more nuance to Berkshire Hathaway’s pile of cash, and that it doesn’t reflect the idea that Buffett is bearish on the stock market or that a stock market crash is imminent.

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“Everyone gets excited, they get hyperbolic about it, but it’s not that big a number,” Bloomstran said.

Putting Berkshire’s cash pile into perspective

Rather than measuring Berkshire Hathaway’s cash position on an absolute basis, Bloomstran says investors are better off measuring its cash as a percentage of Berkshire’s total assets.

And at 17.5%, Berkshire Hathaway’s current cash position is about in line with the long-term average when measured against the company’s total assets. According to Bloomstran, Berkshire Hathaway has averaged 13% of assets on its balance sheet since 1997.

Another way to look at Berkshire Hathaway’s cash position is to compare it to the company’s market valuation, which paints a similar picture. Berkshire Hathaway’s $189 billion in cash is actually at a fairly normalized level, and well below its 2004 peak of almost 40%.

Warren Buffett's cash positionWarren Buffett's cash position

The connection

Berkshire Hathaway is required to maintain cash

Just because Berkshire Hathaway holds nearly $200 billion in cash doesn’t mean they can invest all that money if they find a big enough target.

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“I think about half of the money is legitimately deployable,” Bloomstran said.

That’s because Berkshire Hathaway’s massive insurance operations require the company to have ample cash reserves to fund potential insurance payouts.

While Buffett has stated that Berkshire Hathaway will maintain a permanent cash reserve of about $30 billion to fund potential insurance payouts, Bloomstran is taking a more conservative approach and adding about $50 billion to that reserve level to account for a full year’s worth of potential insurance losses.

“So we call $82 billion a more or less permanent cash reserve,” Bloomstran said in its annual investor letter, allowing Berkshire Hathaway to invest about $110 billion.

Berkshire Hathaway’s investable universe is small

Due to Berkshire Hathaway’s enormous size, there is only a small group of companies it can invest in that will truly move the conglomerate forward.

When you combine that with the fact that cash equivalents like short-term Treasury bonds yield more than 5%, Buffett and company are taking their time to find the right investment at the right price – and that investment can come at any time. , just like in the first quarter of 2016, when Berkshire first invested in Apple.

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At the time, the S&P 500 was near record highs, Apple was the largest company in the world and Berkshire Hathaway’s absolute cash pile was at a record. None of these factors – all of which are present today – stopped Buffett from making one of the best investments in Berkshire Hathaway history.

“He limits himself to perhaps the 100 largest companies in the S&P 500 and perhaps a handful of international companies in which he can invest. So his options are expensive, but he doesn’t mind earning 5.3% in the meantime, but it in no way means a stock market crash is imminent. He’s just trying to find great prices that are stable enough to put money to work.

All things considered, investors shouldn’t have a bearish view of the stock market just because Berkshire Hathaway is sitting on a record pile of cash.

Take it from Buffett himself.

When asked “what is Buffett waiting for?” regarding Berkshire’s cash pile at this year’s annual shareholder meeting, the legendary investor responded:

“We only swing in places we like.”

Read the original article on Business Insider

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