What is Warren Buffet’s Cash Hoard Telling Us?

Warren Buffett is the most iconic American investor, making billions in the stock market. He is a value investor who has used Berkshire Hathaway, his holding company, as his investment vehicle, putting his money where his mouth has been for years. Meanwhile, Mr. Buffett has been an investment philosopher, telling followers to buy when the market shows fear and sell when greed prevails.

At 94 years young, Mr. Buffett is staring at his mortality after losing his partner, Charlie Munger, at the tender age of 99 in late 2023. Over the past months, Warren Buffett has been selling stocks and stockpiling cash. Berkshire Hathaway has a market cap of just over $1 trillion.

Buffett’s cash holdings have soared

• Warren Buffett has sold off a significant amount of Apple (AAPL) and Bank of America (BAC) holdings.
• Buffett’s cash holdings have increased to a record $325 billion.
• The cash holdings represent around one-third of Berkshire Hathaway’s market cap.

The reasons for selling, according to Buffett’s past comments

• Price is what you pay; value is what you get.
• Be fearful when others are greedy and greedy only when others are fearful.
• Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.
• Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.
• Our favorite holding period is forever.
• It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
• The best chance to deploy capital is when things are going down.
• Cash combined with courage in a time of crisis is priceless.
• The Buffett indicator is the ratio of the total U.S. stock market to GDP. As of September 30, 2024, the value was $60.86 trillion/$29.24 trillion or 208%.
• The September 30 level was 66.62% above the historical trend line, suggesting the stock market is substantially overvalued compared to GDP.

Interest rates make the risk-free rate of return attractive

• The current Fed Funds Rate of 58% translates to a risk-free annual return of $14.885 billion on the $325 billion cash holdings.
• Longer-term interest rates have increased even though the short-term Fed Funds Rate has declined since late September 2024.
• High rates and the Buffett indicator level have made fixed-income investments attractive.

The differences between Berkshire Hathaway Class A and B Shares

• Berkshire Hathaway shares have two classes: BRK.A and BRK.B.
• On December 9, BRK.A was trading at the $700,112 per share level.
• On December 9, BRK.A was trading at $465.93 per share.
• A have more voting rights than BRK.B shares.
• A shares cannot be split, while BRK.B can be split.
• A shareholders can convert their shares to BRK.B shares on a 30-for-1 basis at any time, while BRK.B shareholders cannot convert their shares to BRK.A shares.
• Warren Buffett created the BRK.B shares in 1996 to make Berkshire Hathaway more accessible to investors.

Is Buffett telling the markets that cash is king?

• Warren Buffett has not paid a dividend since 1967. He believes dividends are horrible capital allocation decisions that are double taxed and interrupt compounding.
• Warren Buffett’s age and mortality could be a reason for his increasing Berkshire Hathaway’s cash position.
• The Buffett indicator points to overvalued stocks.
• The risk-off strategy of increasing cash could be a hint that Mr. Buffett expects the stock market to experience a significant correction or bear market.
• One-third of Berkshire Hathaway’s market cap in cash is a flashing signal that the stock market could experience significant price variance over the coming months.

Warren Buffett’s simple two rules, “never lose money” and “never forget to never lose money,” could be the compelling reason why he has increased Berkshire Hathaway's cash position to one-third of a trillion dollars. Increasing cash with the leading stock market indices at record highs is another example of the legendary value investor being fearful when others are greedy.

In the preface to Poor Richard Improved in 1758, Benjamin Franklin wrote, “A word to the wise is enough, and many words won’t fill a bushel.” Warren Buffett’s words have been scarce, but his actions could be a compelling signal to wise investors.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!