On a scorching summer day in Omaha, thousands of investors descended on the downtown convention center. They came from across America and around the world, making the annual pilgrimage to the investor mecca. The draw? Berkshire Hathaway’s yearly shareholder meeting and a chance to hear wisdom from the Oracle himself – Warren Buffett.
As the 93-year-old billionaire took the stage, his everyman demeanor and self-deprecating jokes belied the staggering figures on Berkshire’s balance sheet. Buffett’s conglomerate, a sprawling empire of insurance, railroads, energy and consumer companies, had amassed a mind-boggling $168.6 billion cash hoard.
For the world’s most famous investor, that mountain of cash represented both a blessing and a curse. On one hand, it provided unparalleled firepower to pounce on attractive buying opportunities. But it also reflected Buffett’s growing struggle to put Berkshire’s capital to work in a market he sees as wildly overvalued.
“For whatever reason, markets now exhibit far more casino-like behavior than they did when I was young,” Buffett told shareholders, describing today’s trading as more akin to gambling than investing.
Those sobering words from the man whose stock picks over six decades have trounced the S&P 500 by an incredible 5 million percent carry immense weight on Wall Street. When the Oracle speaks, investors listen.
Buffett’s Brilliant Market-Beating Run Berkshire’s ascent from a struggling New England textile maker to a $700 billion behemoth ranks among the greatest wealth-creation stories in capitalism’s history. It’s a tale that could only have been scripted by Buffett, the son of a U.S. congressman who was gifted his first stock at age 11.
Over nearly 60 years at Berkshire’s helm, the investing savant has guided the company from taking baby steps to striding like a giant across the corporate world. His preference for great businesses at good prices led Berkshire to acquire See’s Candies, GEICO, BNSF Railway and dozens of other trophy assets.
More crucially, Buffett’s impeccable stock-picking acumen is virtually unmatched. Investments in Coca-Cola, American Express and Apple have printed fortunes over the decades. With a net worth around $107 billion, Buffett ranks among the world’s five richest people, a staggering feat for a man famous for his frugal ways.
Yet in recent years, the Oracle’s market-trouncing touch has seemed to cool somewhat. From 2009 to 2023, Berkshire’s shareholder return lagged the S&P 500’s total return, including dividends. After decades as an unstoppable investing force, Berkshire hit a rare rough patch.
Buffett admits he made some high-profile blunders, overpaying for errors like the disastrous Kraft Heinz deal. Other missteps included an ill-timed $10 billion investment in Occidental Petroleum right before the pandemic oil crash.
Still, these stumbles pale compared to Buffett’s overall incredible track record of compounding capital at rates singularly impressive over the ultra-long term. Berkshire’s success enriched legions of ordinary investors who bet on the Oracle years ago.
Why Buffett Is Hoarding Cash Now Given his stellar returns historically, Buffett’s rapidly growing cash pile raises eyebrows. Why is a famed bargain hunter like him holding over $168 billion in cash when stocks have repeatedly hit new highs?
The answer lies in Buffett’s longstanding value investing philosophy of only buying quality companies at reasonable prices. And by his preferred valuation measures, today’s market looks anything but reasonably priced.
Consider the cyclically adjusted price-to-earnings (CAPE) ratio, one of Buffett’s favored metrics for analyzing value. The CAPE smooths out earnings volatility by taking the S&P 500’s current price and dividing it by its average inflation-adjusted earnings over the prior 10 years.
When Buffett first started investing in the 1950s, the CAPE ratio stood at 12.7 – implying the broader market traded at sane valuation levels relative to corporate profitability. But today, after a decade-plus bull run supercharged by rock-bottom interest rates, that ratio has skyrocketed to 35.
Put another way, the S&P 500 trades at roughly double its long-term average valuation based on CAPE data stretching back to the 1870s. Stocks look very expensive compared to their underlying earnings power.
Buffett acknowledged as much in his latest letter to shareholders. He lamented “investors…viewing the flood of ‘hot’ money…as a revolt from anything ‘value-related.'” That implies the Oracle finds scant value in a market trading at nosebleed multiples after a furious bull charge.
A Patient Value Investing Strategy Of course, Buffett hasn’t given a precise CAPE level that would trigger his buying. But history suggests the legendary investor tends to go on buying binges when CAPE ratios dip into the high teens or lower.
The last time stocks looked this richly priced based on CAPE was during the late 1990s tech bubble frenzy. Back then, after the metric peaked around 44 in late 1999, the market soon plunged into a brutal downturn that shaved 50% off the S&P 500 in just over two years.
It was during that environment of widespread selling that Buffett went on a bargain-hunting spree, plowing billions into beaten-down bank and consumer stocks. Those bets helped fuel big Berkshire profit hauls in the following decade.
Today’s lofty CAPE ratios combined with Buffett’s mounting cash reserves suggest he is awaiting a similar opportunity to strike. But the famed investor’s patience is legendary. He has repeatedly stated his “favorite holding period is forever” when referring to stocks.
Buffett knows panicking and trying to time short-term market zigs and zags is a fool’s errand.Instead, he focuses on operating Berkshire’s businesses well while diligently seeking out underpriced securities when the market inevitably experiences bouts of pessimism and fear.
“We don’t get a quote on fear…People get frightened when others are fearful,” Buffett has remarked about his investment approach. Translation: He sees manic market swings as windows to buy quality companies when prices get beaten down.
Will Buffett Deploy His Cash Anytime Soon? So will Buffett deploy some of Berkshire’s $168 billion cash stockpile soon? Based on his past comments and actions, it seems unlikely unless a sudden market swoon develops.
Speaking to CNBC in early 2023, Buffett confessed “I don’t think we’ll be buying any public securities, because the prices are extremely high and we won’t find anything.” Those aren’t the words of a man preparing to go on a buying binge anytime soon.
That said, some value investors believe pockets of opportunity exist even in today’s frothy market, especially in banking stocks pummeled by recent instability. Berkshire exited the first quarter holding over $27 billion worth of Bank of America shares, its second-largest equity investment.
If the regional banking jitters deteriorate further, Buffett could theoretically boost his already massive stake in BofA or other well-capitalized lenders trading at distressed levels. Yet given his apprehension about current valuations, large-scale purchases seem unlikely for now.
As he reiterated to shareholders last year, “We haven’t really found anything very intelligent to do” given the frothy conditions.
A Cash Cushion for the Next Big Opportunity Instead, Buffett’s growing cash mountain appears primarily aimed at fortifying Berkshire’s strength for whenthe next significant market sell-off eventually arises. Maybe that downturn arrives six months from now. Or perhaps it takes a couple of years.
Regardless of the timing, Buffett knows market history shows major declines are inevitable over any multi-decade investment horizon. And when that next bout of fear and despair hits, the Oracle wants Berkshire holding maximum “dry powder” to scoop up bargains left for dead.
“We’ll be ready when there’s really something pretty obvious,” Buffett told CNBC about eventually spending his cash hoard. For an investing legend whose greatest talent is pouncing when Wall Street panics, few statements better encapsulate his strategy.
By hoarding over $168 billion, Buffett has assembled an arsenal to leverage the next major selloff as one of history’s biggest wealth compounders. The cash pile serves as a stark warning to Wall Street – the Oracle believes stock markets remain overheated, but he’s lying in wait.
Perhaps his short-term cautiousness will prove mistimed, and markets have further room to run before any correction hits. Only time will tell. But based on Buffett’s stunning long-term track record, investors would be wise not to ignore the Oracle’s somber market outlook.
