Warren Buffett issued a $277 billion “warning” for the stock market. Investors may want to ignore it (mostly).

Starting at the end of the second quarter, Berkshire Hathaway (BRK.A 0.94%) (BRK.B 0.97%) held a record $277 billion in cash, cash equivalents and U.S. Treasury bills on its balance sheet — more than double what it held six quarters earlier. The giant conglomerate has also been a net seller of shares over the past year and a half. As of December 2022, its stock purchases totaled $21 billion, but stock sales exceeded $137 billion.

Those capital allocation decisions could easily be interpreted as a warning from CEO Warren Buffett. He manages the bulk of Berkshire’s equity investment portfolio, so record levels of relatively liquid capital imply he’s struggling to find stocks worth buying in the current environment.

One logical conclusion is that Buffett believes that the stock market could plummet in the not-too-distant future. The S&P 500 (^GSPC 1.15%) it has advanced 45% since December 2022, which is well ahead of its historical average, so it’s not hard to imagine that a correction could be on the horizon. However, investors should be careful how they interpret Buffett’s $277 billion “warning.” The situation is more complex than it seems at first glance.

Buffett’s warning may not apply to the average investor

Berkshire Hathaway makes money in two ways. It wholly owns several dozen profitable subsidiaries and owns stocks and bonds that actually generate value for it through capital gains, dividends and interest payments. Buffett explained this strategy in his most recent letter to shareholders: “Our goal at Berkshire is simple: We want to own either all or a portion of businesses that are enjoying a good economy, that are fundamentally sustainable.”

Importantly, Berkshire Hathaway has GAAP net worth — otherwise known as “book value” — of $602 billion. By this measure, Berkshire is worth more than any other company in the S&P 500. In fact, its GAAP net worth exceeds that of Apple, Microsoftand Nvidia combined. Of that total, Berkshire had $285 billion invested in stocks (stocks) at the end of the second quarter.

So the conglomerate would need to buy $2.8 billion worth of stock to bring its stake to 1% of its portfolio. And even if the investment in question were to double in value, the value of Berkshire’s portfolio would only increase by a single percentage point and its net worth would increase by less than half a percent. In other words, an investment of this size would ultimately be insignificant.

Of course, that hurdle doesn’t always stop Berkshire from buying stocks. For example, he opened a position in The ultimate beauty in the second quarter, worth just $266 million as of June 30. However, Ulta will never significantly move the needle for Berkshire, as further stock purchases are limited by Ulta’s $18 billion market cap.

This brings us to a key question: How many companies are big enough to be worthwhile investments for Berkshire? The answer is not many. Fewer than 200 publicly traded companies are worth more than $100 billion, fewer than 70 companies are worth more than $200 billion, and under 30 companies are worth more than $300 billion. Even fewer fall within the purview of Buffett or his investment managers, Todd Combs and Ted Weschler.

Buffett said as much in that recent shareholder letter: “There are only a handful of companies left in this country capable of really moving the needle at Berkshire, and they’ve been taken over endlessly by us and others.” Finally, he concluded: “All in all, we have not the possibility of astonishing performance.”

However, this obstacle does not apply to the average investor. For most people, making $100,000 in the stock market would be a big deal, and there are no size-based limits on the companies that retail investors could choose from in search of those returns. As such, the average investor should not interpret Berkshire’s massive position in cash and Treasuries as a dire warning. It may say more about the size of the conglomerate than the stock market.

Proceed with caution, but don’t avoid stocks entirely

Readers should not interpret anything I have said to suggest that I believe the stock market will only move higher from here. Recent economic data and high valuations suggest that a stock market correction or bear market is well within the realm of possibility in the short to medium term.

For example, the disappointing July jobs report earlier this month showed that wages rose much less than expected, while unemployment — while still relatively low — reached its highest level in nearly three years. The data raised questions about whether the Federal Reserve waited too long to start cutting the benchmark federal funds rate.

Adding to the uncertainty, the Labor Department recently said it would have overestimated the number of jobs added in the 12 months ending in March by 818,000. A weakening labor market coupled with high interest rates could push the economy into recession.

Additionally, the S&P 500 currently trades at 25.9 times earnings, a significant premium to the five-year average of 23.5 times earnings or the 10-year average of 21.6 times earnings. That means many stocks are expensive relative to historical standards, so investors could quickly become bearish if future economic data suggests a recession could be coming.

Here’s the bottom line: The stock market may or may not fall in the coming months, but investment strategies that depend on trying to time the market can have disastrous consequences. So while investors should be extra cautious about the stocks they buy in the current environment, avoiding the market entirely could be a costly mistake.

For example, Berkshire Hathaway has been a net seller of stocks since December 2022 — but the S&P 500 has advanced 45% during that time. Investors who avoided the market during that time missed out on substantial gains. Moreover, even if the S&P 500 falls sharply in the future, there is no guarantee that it will give up all those gains. And investors who sell stocks to avoid losing money in a possible correction will also miss out on the recovery that history suggests will follow.