Warren Buffett and his Cash Pile

Warren Buffett has been a net seller of stocks for 9 straight quarters:

Since he is such a celebrity in the world of investing we should study this in detail and try to come up with explanations of why that might be happening.

Here is growth in his cash pile so far:

The one obvious explanation of why he is accumulating cash is of course Warren’s anticipation of a major stock market crash. It is important to note that Buffett’s accumulation of cash is unusual among other famous investors at the moment, most of whom have very little cash. It is also important to note that the last time Warren accumulated a lot of cash was around 2006 which was a bit too early before the 2008 market crash. So if indeed he is preparing for a collapse then he might be early like the last time it happened.

We already noted in earlier publications that the current market environment does look scary. Let's remind our readers of the main points supporting this.

After tax corporate profits as percent of GDP is an important economy-wide metric that depends on margins of businesses. The higher margins allow businesses to capture a higher percentage of profits from sales. Interest rates play a big role in this, among other factors. Higher interest rates make access to capital more expensive and businesses will have higher expenses. For example, take a look at the 1980s when interest rates were very high and 2010s when interest rates were very low.

The last two years have had quite high interest rates relative to the 2010s.

The Buffett Indicator, which is a major indicator of how expensive stocks are in general, is also at record levels. It is calculated as a ratio of stock capitalization to country GDP. Even though it is at a record high, the counter-argument is that the current US stock market is international now and comparing globalized corporate valuations to a single country’s GDP is not an appropriate measure for the modern world. Additionally, companies are much more profitable today than they have been throughout history, especially large companies like the Mag 7.

There can be other explanations for Buffett’s cash pile. First of all, Warren Buffett is 94 years old and he already lost his partner Charlie Munger so it is possible he is preparing for a succession plan. In that case people try to avoid making large investments in a historically expensive market and keep the company healthy and ready for the usually dangerous transition period to new management. Another explanation we could think of is the sheer size of Berkshire Hathaway. It is very difficult to invest in stocks when the company size is such that they can acquire full ownership in approximately 475 companies from the SP500… Finally it is possible he is finding better opportunities in private equity.

Regardless of the reasons behind Warren’s huge cash pile, it is important to note that he is just one of many successful investors and there were better performing famous investors in the last few decades. We will soon find out how smart Warren’s move was. Exciting times!