Amid the repeated highs of the US stock market, the world's most watched investors feel uneasy about investing. Should others be worried about this?

"Stock God" Buffett once joked that his favorite holding period for stocks is "forever". Although he continues to invest heavily in American companies, he has never taken so much money off the table - up to $325 billion in cash and equivalents, mostly in the form of treasury bills.

To understand the scale of these cash reserves, consider this scenario: Berkshire Hathaway could write a check to all companies except for about 25 of the most valuable US listed companies with the remaining money.

In addition to letting dividends and interest accumulate on the balance sheet, in the past few months, this conglomerate has also significantly reduced its holdings of its two major high-risk stocks— $Apple (AAPL.US)$ and $Bank of America (BAC.US)$ In addition, under Buffett's control $Berkshire Hathaway-B (BRK.B.US)$ For the first time in six years, share buybacks have been suspended.

Does this mean ordinary investors should be cautious about the market? Perhaps, but these actions provide more information about Berkshire.

Firstly, Buffett and his late business partner, Charlie Munger, have outperformed the stock market by 140 times, not because they are market "timers". As Munger's most famous quote may suggest, the first rule of compounding is: unless absolutely necessary, never interrupt this process. Investors closely watching Berkshire hope for a little bit of Berkshire's magic to work in their portfolios. They are more concerned about what Berkshire is buying and selling, but pay little attention to when.

However, Buffett, who always seemed optimistic and patient, has been cautious before. He closed a highly successful partnership business in 1969, stating that the market bubble was too large and accumulated a large amount of cash in the years leading up to the global financial crisis (finally using that money for speculation).

"He realizes the fact of market volatility and extreme trends," said Adam J. Mead, a fund manager from New Hampshire, who specializes in Buffett's investment philosophy and is also the author of "The Complete Financial History of Berkshire Hathaway."

Overvaluation of stock prices does not mean they are on the brink of collapse or a bear market, but we should take a longer view to see what the current valuations imply for returns over the next few years (including good and bad times).

Goldman Sachs strategist David Kostin recently predicted that in the next 10 years$S&P 500 Index (.SPX.US)$the average annual return rate will only be 3%, less than one-third of the post-war level. When investors are highly optimistic, Kostin's report sounds like a broken record, but it is consistent with other forecasts.

Vanguard, a large asset management company, recently forecasted that over the next 10 years, the annual return of large US stocks will be between 3% and 5%, while the annual return of growth stocks will be only 0.1% to 2.1%. Nobel laureate economist Robert Shiller's advocated cyclically-adjusted price-to-earnings (CAPE) ratio aligns with an average annual return of around 0.5% after inflation adjustments, similar to Kostin's forecast.

The simpler "Buffett Indicator" is also similar. Buffett once referred to it as "perhaps the best single measure of where valuations stand at any given moment." This indicator, in its various forms, is essentially the ratio of the total market cap of all listed stocks to the size of the US economy. For example, using the Wilshire 5000 Index, this indicator is currently around 200%, indicating stock valuations higher than during the peak of the tech bubble.

Given that current US Treasury yields are higher than expected stock returns, Buffett seems to have reduced his stakes as much as possible due to concerns that high-risk stocks have no upside potential. However, he openly stated that he is willing to spend this money.

"What we really want to do is acquire great companies," he said at the Berkshire Hathaway annual meeting in 2023. With a huge cash reserve, "if we can acquire a company at a price of 50 billion, 75 billion, or 100 billion USD, we can do it."

Berkshire's market cap has exceeded 1 trillion USD. Mead explained that based on the current balance sheet, the transaction value matching acquisitions like Burlington Northern Santa Fe in 2010 or General Re insurance in 1998 would reach 100 billion USD.

Does this also mean that Buffett believes it is valuable to reserve" dry powder" before the next crisis or bubble bursts? Yes, although he did not explicitly say so. On the other hand, his choice is not universally applicable, as individual investors have more options than he does.

First, individual investors do not need to pay a premium of 20% or more above the market price when acquiring a company like Berkshire does. In addition, individual investors can invest in non-US markets and small-cap stocks. For example, Vanguard expects annual returns of 7-9% for non-US developed economy stock markets and 5-7% for US small-cap stocks over the next 10 years.

However, apart from a very profitable bet on a Japanese trading company in recent years, Buffett's funds are still mainly focused on the US and are likely to continue to be so.

Changes at Berkshire are inevitable, not just because the 94-year-old is nearing the end of his remarkable career. Buffett has returned cash to shareholders without hesitation, almost entirely through share buybacks, but he now apparently believes that even his own stocks are too expensive.

Berkshire's massive size also prevents it from replicating its long-term record of deploying profits and easily outperforming the market. Mead believes it will have to somehow give the money back - possibly through dividends. Ultimately, this turns into a necessary interruption of compounding.

Editor/Rocky