FX168 Financial News Agency (North America) Warren Buffett has increased Berkshire Hathaway's cash reserves to over $300 billion, hitting a historic high.
Warren Buffett has been selling stocks at an astonishing pace and accumulating cash, sparking speculation as to why this global leading stock picker is withdrawing funds from the market.
As of September 30, within two years, cash, treasury bills, and other liquid assets of Berkshire Hathaway have roughly doubled, reaching a record-breaking $325 billion (or $310 billion after deducting nearly $15 billion in treasury bond purchases).
The conglomerate's cash reserves now exceed Berkshire's total market cap over a decade ago. By the end of this quarter, Berkshire's total assets amount to $1.15 trillion, with at least 27% coming from this portion of assets, marking the largest proportion in many years.
One significant reason for the swollen cash reserves is the lack of attractive investment opportunities. Buffett is a value investor, adept at finding bargains, but these bargains have become increasingly scarce in recent years.
"I've heard every speculative idea imaginable, from accumulating capital for the end of the world to planning huge cash dividends," said Lawrence Cunningham, director of the Weinberg Center for Corporate Governance at the University of Delaware and author of several books on Buffett and Berkshire in an interview with Business Insider, discussing the reasons behind Berkshire's large cash reserves.
"Both seem somewhat far-fetched," he said, "the most likely reason for Berkshire's cash accumulation is the lack of attractive capital deployment opportunities."
Cunningham noted that the stock market has soared to historic highs, valuations of private enterprises have surged, and Berkshire's subsidiaries (such as Geico and See's Candies) can only deploy so much capital, while Berkshire's Class A shares have climbed to a record level of around $0.7 million.
Wilshire Index data shows that the total market cap of the US stock market hit a new high of $58.13 trillion on Monday, setting a historical high of 198.1% of the US GDP in the previous quarter.
This indicator is known as the 'Buffett indicator' because investors have praised it as an excellent valuation standard. Buffett has stated that when this indicator soared during the dot-com bubble, it should be a 'very strong warning signal,' and buying stocks when the indicator is close to 200% is 'playing with fire.'
The high level of the Wilshire 5000 Index has made 'this stock market the most highly valued in history - even higher than during the 2001-2002 technology bubble peak,' said Paul Dietrich, Chief Investment Strategist at B. Riley Wealth Management.
Therefore, Buffett's decision not to repurchase any Berkshire Hathaway stocks last quarter, after spending $20 billion to buy back stocks from the start of 2022 to June 30 of this year, may not be surprising - perhaps because he and his team no longer see their company's stock as having good value.
His team has also been trimming Berkshire's stock investment portfolio. They sold stocks worth $133 billion in the first nine months of this year - an amount exceeding Citigroup's market cap - and bought stocks worth less than $6 billion during the same period.
During this period, they reduced their most valuable holding, Apple's stock, by 60%. They also reduced their second-largest holding, Bank of America, by 23% from mid-July to early October.
Increased selling and decreased buying drove Berkshire to increase its cash reserves by over $140 billion in the nine months ending September 30.
Feeling down and getting ready.
Berkshire has so much cash reserves, among other possible reasons. Buffett stated in May that the potential increase in capital gains tax was one of the reasons for him cashing in part of the massive gains in Apple—although Donald Trump's re-election is expected to prevent a short-term increase in capital gains tax.
The 'Oracle of Omaha' now earns much more from U.S. Treasuries than three years ago when rates were close to zero. As of September 30, Berkshire's stock holdings were valued at 288 billion U.S. dollars—exceeding the Fed.
The 94-year-old billionaire may be cashing in on some of his winning bets like Apple to protect his estate. He may also be cleaning up his investment portfolio, setting aside cash for Greg Abel, Berkshire's non-insurance businesses chief, to take over as CEO after him.
University of Maryland finance professor David Kass, who has been following Buffett for nearly 40 years, suggests that the investor may be 'preparing for the transition to Greg Abel, enabling him to decide with Ted Weschler and Todd Combs how to invest these funds,’ referring to Buffett's two investment managers.
Buffett may also be saving money because he foresees trouble ahead.
'When leading economic indicators, inverted bond yields, and his famous Buffett Indicator point to a bear market or recession on the horizon, he sells stocks,' Dietrich says.
'After the current stock market highs eventually come down,' Buffett can leverage his cash reserves to repurchase Apple and other stocks he sold at a significant discount,” Dietrich adds.
Whether Warren Buffett intentionally built an ark for possible emergencies, because he expects the stock market to crash or economic collapse, or simply was eliminated by market pricing, if an economic downturn really occurs, he is prepared to have enough firepower to buy low-priced stocks and companies again.
