Why Warren Buffett’s record $189 billion in cash isn’t the market crash signal some say it is

• Berkshire Hathaway is sitting on a record cash pile at $189 billion.

• That’s no reason to worry about an imminent stock market crash, according to one fund manager.

• “Everybody trains, they get hyperbolic about it, but it’s not that big of a number,” Chris Bloomstran said.

Berkshire Hathaway reported its first-quarter results last month, and like clockwork, plenty of bearish investors pointed out that Warren Buffett is sitting on a record $189 billion cash pile.

The implication, according to these commentators, is that the stock market will soon suffer a massive decline because Buffett sees no value in investing his company’s massive cash at skyrocketing current valuations.

In fact, that couldn’t be further from the truth, according to Chris Bloomstran, fund manager at Semper Augustus, which manages about $550 million in assets and counts Berkshire Hathaway as its largest position.

In an interview with Business Insider last month, Bloomstran explained that there are many more nuances to Berkshire Hathaway’s cash mountain and it doesn’t reflect the idea that Buffett is bearish on the stock market or that a stock market crash is imminent.

“Everybody gets excited, they get hyperbolic about it, but it’s not that big of a number,” Bloomstran said.

Putting Berkshire’s cash pile into perspective

Rather than measuring Berkshire Hathaway’s cash position on an absolute basis, investors would be better off measuring the cash pile as a percentage of Berkshire’s total assets, according to Bloomstran.

And at 17.5%, Berkshire Hathaway’s current cash position is roughly in line with its long-term average as measured against the company’s total assets. Berkshire Hathaway has kept cash on the balance sheet at an average of 13 percent of assets since 1997, according to Bloomstran.

Another way to look at Berkshire Hathaway’s cash position is to measure it against the company’s market valuation, which paints a similar picture. Berkshire Hathaway’s $189 billion in cash is actually at a fairly normal level and well below its peak of nearly 40% in 2004.

Berkshire Hathaway needs to keep cash

Just because Berkshire Hathaway has nearly $200 billion in cash doesn’t mean they can invest all that money if they find a big enough target.

“I think about cash, about half of it can be deployed legitimately,” Bloomstran said.

This is because Berkshire Hathaway’s massive insurance operations require the company to have a large cash reserve to fund potential insurance payouts.

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While Buffett said Berkshire Hathaway will maintain a permanent cash reserve of about $30 billion to fund potential insurance payouts, Bloomstran takes a more conservative approach and adds about $50 billion to that level of reserves to account for potential insurance losses for a full year.

“So we call $82 billion a more or less permanent cash reserve,” Bloomstran said in his annual letter to investors, leaving about $110 billion available for Berkshire Hathaway to invest.

Berkshire Hathaway’s investable universe is thin

Because of Berkshire Hathaway’s massive size, there is only a small group of companies it can invest in that will really move the needle for the conglomerate.

When you combine that with the fact that cash equivalents like short-term Treasuries yield more than 5%, Buffett and company are taking their time to find the right investment at the right price — and that investment could come at any time. , just like in the first quarter of 2016, when Berkshire first invested in Apple.

At the time, the S&P 500 was trading near record highs, Apple was the largest company in the world, and Berkshire Hathaway’s absolute cash pile was at a record high. None of these factors—all present today—stopped Buffett from making one of the best investments in Berkshire Hathaway’s history.

“They are limited to the 100 largest companies in the S&P 500 and maybe a handful of international businesses that they can invest in. So his opportunity set is expensive, but he doesn’t mind earning 5.3% in the meantime, but it doesn’t in any way mean that a stock market crash is imminent. He’s just trying to find high prices that are stable enough to put the money to work,” Bloomstran said.

All in all, investors shouldn’t be bearish on the stock market just because Berkshire Hathaway is sitting on a record pile of cash.

Take it from Buffett himself.

When asked “what is Buffett waiting for?” Regarding Berkshire’s cash pile at this year’s annual shareholder meeting, the legendary investor responded:

“We just swing at the pitches we like.”

This story was originally published in May 2024.

Read the original article on Business Insider