Berkshire Hathaway is stockpiling cash, following a pattern similar to what it did before the financial crisis. This time, however, there’s a fresh rationale. Should regular investors be concerned when the world’s most-followed investor appears cautious?
Although Warren Buffett has often said his ideal holding period for a stock is “forever,” he’s currently holding back more than ever—around $325 billion in cash, mostly in Treasury bills. While generally optimistic, Buffett has shown caution in the past, famously closing his partnership in 1969 due to high market valuations and amassing cash before the 2008 financial crisis, which he used strategically when the market dipped.
“He understands that markets swing to extremes,” says Adam J. Mead, a Buffett expert and author of The Complete Financial History of Berkshire Hathaway.
The fact that stocks are valued highly doesn’t necessarily mean a crash or bear market is imminent. Instead, it could signal lower returns over the next few years. Recently, Goldman Sachs strategist David Kostin predicted the S&P 500 might return an average of just 3% per year over the next decade—about a third of the historical post-war average.
Though Kostin’s projection surprised investors, it aligns with other forecasts. Vanguard, for example, expects an annual return of 3% to 5% for large U.S. stocks and just 0.1% to 2.1% for growth stocks over the next decade. Additionally, economist Robert Shiller’s adjusted price-to-earnings ratio projects an inflation-adjusted return of about 0.5% annually, similar to Kostin’s forecast. The “Buffett Indicator,” which Buffett has called the best measure of stock valuation, shows that stocks are valued at around 200% of the U.S. economy’s size, surpassing levels seen during the tech bubble.
With T-bills now yielding more than stocks’ expected returns, it seems Buffett is limiting his risk, perhaps waiting for a more favorable market. However, he’s expressed interest in making large purchases. “We’d love to buy great businesses,” he said at Berkshire’s 2023 annual meeting. “If we could buy a company for $50 billion or $100 billion, we could do it.” To put this cash reserve in perspective, it’s enough for Berkshire to acquire nearly any major U.S. corporation outside the top 25, such as Disney, Pfizer, or AT&T. Recently, Berkshire has reduced its holdings in Apple and Bank of America and, for the first time in years, hasn’t purchased more of its own stock.
Should everyday investors adopt the same cautious stance? Perhaps, but Buffett’s cash position might also reveal more about Berkshire’s unique circumstances. Buffett and his late partner Charlie Munger outperformed the market by over 140 times not by timing the market but by adhering to Munger’s famous rule: “Never interrupt compounding unnecessarily.” Berkshire watchers hope to mirror its success, but it would take an acquisition on the scale of 2010’s Burlington Northern or 1998’s General Re—each valued at $100 billion today—to make a significant impact on Berkshire’s $1 trillion valuation.
Could Buffett’s strategy indicate he’s preparing for a market downturn or sees limited opportunities? Possibly, though individual investors aren’t bound by the same constraints. Unlike Berkshire, individual investors can purchase stocks without paying a premium for control and can explore smaller markets. For example, Vanguard projects a 10-year return of 7% to 9% for developed international stocks and 5% to 7% for U.S. small-cap stocks. While Buffett has made recent profitable bets in Japan, he largely keeps his investments in the U.S. and will likely continue to do so.
Changes are inevitable at Berkshire—not only because Buffett, now 94, is nearing the end of his career, but also due to Berkshire’s massive scale. Buffett has gradually returned cash to shareholders via stock buybacks, though he still finds his stock too expensive to buy back aggressively. As Berkshire grows, it may no longer achieve the same market-beating returns, making a dividend payout likely. Eventually, compounding may have to slow down.
