The Zhitong Finance App learned that since the mid-1960s, the total return of the S&P 500 index has been around 34,200%, and since “stock god” Warren Buffett became the CEO of Berkshire Hathaway (BRK.A.US, BRK.B.US), the cumulative increase in the company's Class A shares has reached an astonishing 5,074,030%.

He and his investment team usually look for companies that provide a continuous competitive advantage and have a rock-solid management team. Due to Buffett's tremendous success in money management, both professional investors and ordinary investors tend to refer to his investment strategies. Investors can learn about Buffett's transactions through Berkshire Hathaway's quarterly position report (13F) submitted to the US Securities and Exchange Commission (SEC).

But sometimes, inaction is the best explanation.

Holding $168 billion in cash

About a month ago, Berkshire Hathaway published results for the fourth quarter of 2023. The company's Q4 operating profit increased by approximately US$6.5 billion to US$37.4 billion compared to the same period last year. Although Berkshire Hathaway is probably best known for its $376 billion portfolio, which includes 45 stocks and two index funds, the company also owns shares in around 50 companies, such as insurance company GEICO and railway company BNSF.

Notably, for the past five quarters (beginning October 1, 2022), Buffett and his investment “deputies” Ted Weshler and Todd Coombs have been net sellers of the stock. In other words, in the past 15 months, they have sold more shares than they have bought, totaling close to $39 billion.

Receiving positive cash flow from operations, and being a net seller of stocks, Berkshire Hathaway's cash reserves swelled to an all-time high of $167.6 billion.

Generally speaking, having plenty of cash on hand provides most businesses with enviable financial flexibility in terms of innovation, return on capital, and acquisitions.

But Berkshire Hathaway is no ordinary company. For decades, Buffett and his team have been counting on Berkshire's capital to supplement the growth of operating profits and drive return on investment. In short, rapidly growing cash reserves suggest that Buffett hasn't found any companies worth investing in. His reluctance to put the company's capital to use is a silent warning that investors should not ignore.

The valuation of US stocks is at an all-time high

Although Buffett claims he will never short the US, Berkshire's growing cash reserves suggest he won't bet on stocks if the valuation is inappropriate.

Although Wall Street has no shortage of methods to analyze valuations, the Schiller price-earnings ratio (P/E) of the S&P 500 index, also known as the cyclically adjusted price-earnings ratio (CAPE), is one of the best methods.

Schiller's price-earnings ratio does not use earnings from the past 12 months like traditional price-earnings ratios, but is based on average earnings adjusted for inflation over the past 10 years. Inflation-adjusted earnings excluded one-off events that could affect traditional valuation analysis, such as the COVID-19 pandemic.

Going back to 1871, the average Schiller price-earnings ratio of the S&P 500 index was 17.1 times, which is not that high. As of the close of trading on March 20, 2024, Schiller's price-earnings ratio of the S&P 500 index was slightly less than 35 times. This was one of the highest multiples during the bull market.

Throughout history, whenever Schiller's price-earnings ratio exceeds 30 times and remains at this level for a long time, the stock market risks falling. Since 1871, the Dow Jones Industrial Average or S&P 500 Index has experienced this situation five times; in the end, the stock market all fell 20% to 89%.

However, Schiller's price-earnings ratio is not a timing tool. For example, between 1997 and 2001, the indicator remained above 30 for 4 years, after which the internet bubble hit highly valued growth stocks hard. Schiller's price-earnings ratio now close to 35 doesn't mean that the stock market will fall any time soon. But history does show that a bear market will eventually arrive.

Buffett said in his recent annual letter to shareholders: “For whatever reason, the current market is behaving more like a casino than when I was young.” A prominent investor described the stock market as a “casino,” which shows that value is hard to find at the moment.

Patience and foresight will always outweigh market timing

Although Buffett is outspoken about Wall Street's “casino” characteristics, he has made it clear many times that he will never short the US. Buffett understood better than most investors that patience and foresight are far more important than trying to grasp short-term trends in stocks.

For example, economic slowdowns and recessions are a normal part of the economic cycle. Since the end of World War II, the United States has experienced 12 recessions, 9 of which were resolved in less than a year. None of the remaining 3 times lasted more than 18 months. In contrast, most growth periods can last for several years, and two times the growth period exceeded the 10-year mark.

This imbalance in the duration of economic expansion and recession is also evident in the stock market. Although the stock market does not reflect the performance of the US economy, corporate profits usually fluctuate with the health of the economy.

According to Bespoke's data, the bear market lasts an average of 286 calendar days, or 9.5 months. On the other hand, over the past 94 years, a typical bull market has lasted 1,011 calendar days, about 3.5 times the average time of a bear market. In fact, of the 27 bull markets studied by Bespoke, 13 lasted longer than the longest bear market.

Sean Williams, an analyst at The Motley Fool, believes that Buffett's growing cash reserves clearly but silently admits that neither he nor his team sees much value. But that doesn't mean Buffett gave up on the US stock market, which brought him and his shareholders huge wealth.

For more than half a century, Buffett has been using Berkshire's capital to acquire high-quality businesses at low prices. Although no one knows when Buffett will take action again, it is certain that at some point in the future, a significant portion of Berkshire's $168 billion cash reserve will be put into use.