Warren Buffett’s Warning to Investors as Cash Hits $149 Billion

Warren Buffett has a huge cash problem. His holding company, Berkshire Hathaway, has $149 billion in cash and short-term investments. In our low-interest rate world, this is earning little to nothing. But it gets even worse… 

With the increase in inflation, the real returns on cash and most short-term investments are negative! 

Heck, the 10-year treasury yield only comes in close to 1.5%, while recent annualized inflation numbers are above 5%. Investors can lock into 10-year “risk free” notes and they’re getting negative real returns. The world we live in… 

Warren Buffett’s Cash Pile Grows

With massive amounts of stimulus that have propped up assets across the board, we’re seeing anomalies. Big deviations from long-term historical averages. This is important for investors like you and me. And with the trends you’re about to see, it pays to watch how the world’s best investors manage their money around them. 

In this article, there are a few key takeaways. And to start, we’ll take a closer look at Warren Buffett’s cash problem… 

Warren Buffett's cash pile growth 2010-2021 via Berkshire Hathaway

Since 2010, Warren Buffett’s cash pile has climbed from below $40 billion to over $149 billion today. It’s up close to 300%. Warren Buffett is struggling to find worthwhile investments. And there are two main reasons why… 

1. Berkshire Hathaway is too Big

Part of this is due to size constraints. There are some accounting and reporting rules that factor into this as well. Berkshire is a much larger company than it used to be… 

On top of its huge cash pile, the company’s market cap comes in at over $600 billion. So, targeting $1 billion, $2 billion or even $10 billion dollar companies doesn’t make as much sense as it used to. To really move the needle, Berkshire has to focus on $50 or $100 billion plus companies.  

Warren Buffett is fishing in a pond with much fewer fish. Sure, they’re bigger fish, but most of them aren’t worth their weight today… 

2. The Stock Market is Overvalued

Since 2010, the stock market is up more than 300%. But total company earnings haven’t grown nearly as fast. As a result, stocks look expensive based on many metrics. Here’s the popular S&P 500 PE ratio… 

stock market PE ratio 1900-2021 S&P 500

This chart goes back over a century. You can see that the recent PE ratio far outpaces long-term averages. It was only higher around the dotcom and housing bubbles. And when it comes to long-term stock returns, the PE ratio has been a useful indicator. 

I did a breakdown on the correlation between the PE ratio and 10-year stock market returns. That video is one of my earlier ones but the insight is still useful today.

Many other metrics are showing an overvalued stock market as well. One of Warren Buffett’s favorites is total stock market cap to GDP. It’s climbed higher than even the dotcom and 2008 bubbles. It’s harder to justify buying most stocks today. 

With these lofty valuations and fewer viable stocks to pick from, it’s no wonder Warren Buffett’s cash pile has grown. There’s a time-tested strategy to this but it hasn’t stopped the naysayers… 

Warren Buffett’s Cash Problem is an Opportunity

Some people have said Buffett is losing his magic touch. And some criticism makes a little sense. Berkshire Hathaway underperformed for a five-, 10- and even 15-year stretch. Although, that’s turned around recently and even during that time, I wouldn’t bet against this legendary investor. 

He’s a tried-and-true value investor. Sure, he’s missed out on some big opportunities, but that’s part of the investing game. Luckily, it’s not three strikes and you’re out. Instead, you can keep waiting for the best pitch for easy homeruns. 

Doing nothing isn’t easy to do but waiting for great deals has paid off bigtime over the long run. If you invested just $1,000 into Berkshire Hathaway in 1965, it would have climbed to over $28 million today. 

Investing in Berkshire Hathaway vs. S&P 500 returns

To compare against average stock market returns, the red line in the chart shows the S&P 500. Investing $1,000 in the S&P 500 would have grown close to a quarter of a million dollars. Not too shabby. But I think anyone would prefer $28 million instead. 

Follow Warren Buffett’s Strategy

Warren Buffett has gone through plenty of periods of underperformance. When stock valuation growth outpaces underlying cash flow growth, he tends to pump the brakes. Cash builds and weighs down returns. 

And this is a warning to investors that the market is frothy, along with many other valuation metrics. It’s hard to find worthwhile investments. Although, this is what helps set him apart… 

When a market downturn hits, he has all that cash ready to go. He can then pick up beaten down investments when they trade at much cheaper valuations. One of his many bits of wisdom… Be fearful when others are greedy, and greedy when others are fearful. 

That’s easy to say… but it’s hard to put into practice. On top of that, going against the crowd doesn’t always work. Nonetheless, you have to go against the crowd if you at least want a shot at beating average returns. 

Invest mindfully, 

Brian Kehm 

Sharing is caring...

Leave a Reply