Forecasts may tell you a great deal about the forecaster.
They tell you nothing about the future.—Warren Buffett
There’s been a wild rumour flying around lately.
It goes like this: Warren Buffett is stockpiling a mountain of cash.
$189 billion worth of liquidity.
So, bearish forecasters are saying that this is a sign of the Apocalypse. They are saying that this is a sign that Buffett is predicting a market crash. They are saying that we should all start to panic.
But…is any of this actually true? Or…is this just FEAR (False Evidence Appearing Real)?
- Well, first things first. Yes, Buffett does have a cash pile of $189 billion. And, yes, $189 billion does sound like a huge sum.
- However, in the grand scheme of things, $189 billion is actually relatively small. Here’s why: it only represents 21% of his company Berkshire Hathaway [NYSE:BRK.A], which has a $918 billion market capitalisation.
- This is well within the historical norm. For the sake of comparison, Buffett’s present cash pile is actually very much below the 40% peak that he last held in 2004.
Now, interestingly enough, here’s another fact that’s not widely reported:
- Berkshire Hathaway is a very large conglomerate. It has over 390,000 employees. This means it has extensive insurance operations to look after.
- For this reason, Buffett is required to keep sufficient liquidity on tap. This is to cover any potential insurance payouts.
Chris Bloomstran of fund manager Semper Augustus has done his own analysis. What he’s uncovered is very revealing:
- He estimates that $82 billion of Berkshire’s cash is actually held as a permanent reserve. This is intended to cover at least one year of potential insurance payments.
- So, what happens if you exclude that insurance element? Well, this means that Buffett is only willingly holding $107 billion in cash — which makes up roughly 12% of Berkshire’s market cap.
- Just think about it: 12%. This is not quite the game-changer that bearish forecasters have been suggesting. Certainly, it’s not a sign of any impending doomsday.
What I find interesting is that Buffett himself is no fan of predictions. He has said this:
‘We haven’t the faintest idea what the stock market is going to do when it opens on Monday. We’ve not been good at timing. We’ve been reasonably good at figuring out when we were getting enough for our money.’
Most tellingly, Buffett has made no statements about any crash forthcoming:
- He still remains an optimist. He still remains invested. He still continues to find value.
- In May 2024, it was confirmed that Berkshire Hathaway has been steadily buying into Chubb Limited [NYSE:CB], an insurance company. Berkshire has spent $6.72 billion to acquire 25.92 million shares. This makes Chubb the 10th largest holding in Berkshire’s portfolio.
Of course, Warren Buffett knows the odds as well as anyone:
- Historically speaking, in one year’s time, there’s a 75% chance that the market will be higher than it is now.
- So, Buffett is continuing to buy into value where he finds it. And he’s doing it with the same practised eye that’s made him a legend since 1965.
- Personally, I find his approach bullish, not bearish.
Regards,
John Ling
Analyst, Wealth Morning
(This article is the author’s personal opinion and commentary only. It is general in nature and should not be construed as any financial or investment advice. Past performance does not indicate the future. Wealth Morning offers Managed Account Services for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013.)