Wall Street is pouring funds into stocks as the market hits new highs following Donald Trump’s re-election.
But Warren Buffett, America’s most iconic investor, is taking a very different path, which is a red flag to many.
He recently sold tens of billions of dollars worth of shares in two of his longtime favorites, Apple and Bank of America.
This shift has boosted Berkshire Hathaway’s cash reserves to a record $325 billion, enough to buy all but the top 25 U.S. companies.
In simple terms, Buffett is hoarding cash rather than diving into the unprecedented rally. For a seasoned investor known for holding stocks “forever,” this cautious approach has raised eyebrows.
Experts say this could mean one of three things: Buffett fears a stock market crash, he may believe stock prices will stagnate while cash offers a safer return, or he could be waiting patiently to make an acquisition. important when the timing and value are right. good.
Warren Buffett has been selling shares and his Berkshire Hathaway conglomerate now has cash reserves that have soared to a record $325 billion.
So when the world’s most watched investor decides to stay out of the stock market, it’s worth asking: Does he know something we don’t?
Buffett and his late business partner Charlie Munger have always focused on holding stocks over a long period of time, rather than trying to time the market.
They like to profit as stock prices rise and companies pay dividends, all of which is reinvested.
“Never interrupt preparation unnecessarily,” Munger advised.
Compounding is one of the best tips from successful investors like Munger and Buffett.
It’s a mantra Buffett has followed throughout his career, prioritizing the steady accumulation of wealth over any quick profits. You never try to time the market by buying or selling at certain times. Instead, you choose a company you like and stick with it.
But even Buffett’s patience has limits. In 1969, he closed his investment company amid what he considered a speculative excess. Before the 2008 financial crisis, it built up cash reserves, ready to buy when markets fell.
Adam J. Mead, money manager and Buffett expert, told the Wall Street JournalThe “Oracle of Omaha understands that stocks go up and down: “He is aware of the fact that markets rotate and go to extremes.”
Their decision to hoard cash could be driven less by fear of an immediate crisis than by a longer-term view of lower stock returns in the coming years.
Goldman Sachs recently forecast that the S&P 500 would return just three percent annually over the next decade, a stark contrast to historical averages. The S&P typically rises around ten percent a year and, after one of its best years on record, is up a whopping 26 percent so far in 2024.
Vanguard has made similarly cautious predictions, projecting three to five percent for big U.S. stocks and even slimmer margins for others.
That means holding cash in savings accounts — which for someone like Buffett means Treasury bonds — is much more attractive. Yields are at similar levels, but Treasuries are protected from any decline.
Buffett’s own measure of market froth, the ‘Buffett Indicator’, shows a current value of the US stock market of around 200 percent of GDP.
This puts current valuations close to where they were in the tech bubble.
With yields on safe Treasury bills rivaling stocks, it’s no wonder Berkshire holds on to so much cash.
But there could be another reason why it has built up a cash reserve of $325 billion.
Buffett remains eager to find the right opportunity.
“What we would really like to do is buy large companies,” he said at Berkshire’s 2023 annual meeting.
Mead suggests that, given Berkshire’s enormous size, a massive deal of between $50 billion and $100 billion would be needed to “move the needle” in the same way that acquisitions such as Burlington Northern Santa Fe did in 2010 and General Re in 1998. .
There’s another factor to consider: Berkshire’s growth itself.
Now valued at more than $1 trillion, the company simply cannot replicate its initial meteoric rise.
The New York Stock Exchange has soared since Donald Trump won the US election
Over time, returning more cash to shareholders could become inevitable, perhaps in the form of dividends, although Buffett has long avoided them in favor of buybacks.
But now that Berkshire shares are reaching levels that even Buffett might consider too expensive, his reluctance to buy them back suggests a turnaround could be near.
Mead notes: “Over time it becomes necessary to stop capitalization.”
As Buffett, now 94, approaches the latter stages of his career, Berkshire’s future may demand more flexibility.
If you decide to use that cash to buy a company? It would allow Berkshire to buy almost any company in the world outside of the 25 largest.
So, while you couldn’t buy Amazon, you could get companies like Disney, Pfizer or AT&T.
