Warren Buffett is one of the most respected investors of any generation. As a result, the actions he takes on his portfolio via Berkshire Hathaway (NYSE:BRK.B) attract attention. So over the course of the past year or so, something interesting has been noted from the company updates. Here’s what I think it means and what I can learn.
Big numbers
Put simply, Buffett is hoarding cash like never before. In the latest report, it showed that Berkshire had a cash pile of $277bn. That might sound like a lot of money… because it is! For perspective, the largest holding is currently Apple. The market value of this holding is $87.3bn. The next biggest is American Express with a value of just over $38bn.
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So the cash holdings massively outstrip the value of any individual stock being held. Interestingly, the market cap of Berkshire Hathaway is $964bn. So the cash being held makes up a decent portion of the overall value of the firm.
Why I think it’s happening
The cash balance hasn’t always been this high, but it has increased rapidly over the past couple of years. I feel this is down to a few reasons. Firstly, Buffett hasn’t made any sizeable new purchases recently. This indicates to me that he can’t find any value stocks that are attractive enough. Sure, there are opportunities in the stock market. For example, there are some great shares with high dividend yields. But Buffett focuses his strategy on buying undervalued stocks that he feels will do well in the long term. So for his specific focus, he can’t find any good ideas.
Another reason why he could be building his cash is due to the potential for a stock market correction. It’s true that across the pond, the stock markets have been flying. For example, the Nasdaq 100 is up 25% in the past year. For an index of large-cap stocks, that’s very impressive. However, it could also indicate that a correction is coming, as investors start to book some profits and reduce their risk. If this happens, Buffett would be well placed to use his dry powder to snap up some shares at a cheaper level.
Being different
I don’t see myself buying Berkshire Hathaway shares any time soon. However, I do always follow what’s going on with the company due to what I can glean about Buffett’s thinking. In this case, my portfolio set-up is a bit different. The main reason I’m not hoarding cash is because I primarily invest in the UK market. As a result, the valuations are a lot more attractive at the moment.
Further, I have a mix of dividend, growth and value ideas in my portfolio. So although I understand why Buffett is growing his cash balance, it’s not overly going to impact my decision-making right now.
