Late last year, it came to light that Warren Buffett – who’s widely regarded as the greatest investor of all time – was stockpiling cash. At the time, the legendary investor, who’s built up a $70bn fortune from stocks, was receiving criticism for hoarding cash. Many analysts argued he should be plowing that capital back into the market.
It’s a different story today, however. With the stock market having crashed spectacularly over the last month, Buffett’s move to stockpile cash last year now looks like an absolute masterstroke.
Warren Buffett’s enormous cash pile
I wrote about Buffett’s huge cash pile in an article in November. Back then his company, Berkshire Hathaway, had just released its third-quarter results. The results had shown Buffett had a record £128bn in cash and short-term investments at the end of September. That’s an enormous amount to have sitting on the sidelines.
At the time, Wall Street analysts were questioning the logic behind holding so much cash. For example, analysts at UBS said: “We remain surprised that the company has not been more aggressive with share repurchases.” Meanwhile, analysts at CFRA said: “We don’t have a clear sense of Berkshire’s acquisition or capital allocation strategy.”
Looking back now though, Buffett knew exactly what he was doing. Clearly, he wasn’t seeing many buying opportunities due to the fact that stocks had had a great run and valuations were high.
“Prices are sky-high for businesses possessing decent long-term prospects,” he said in a 2018 letter to investors. So he was waiting patiently for a more attractive entry point.
Today, that move to stockpile cash looks like a stroke of genius. I’ll point out I said it was a “very smart move” back in November. Valuations are now much lower than they were late last year and Buffett has a huge amount of firepower at his disposal. This means he’ll be able to take advantage of the bargains on offer.
There’s a great lesson to be learnt from Buffett here and that’s you don’t have to be fully invested at all times. If the market has had a strong run and/or you’re not seeing many compelling buying opportunities, there’s nothing wrong with stockpiling cash and waiting for a more attractive entry point. You shouldn’t buy stocks for the sake of it.
Quite often, novice investors pile all their capital into the market, believing this is the best way to maximise returns. This strategy can backfire in a stock market crash. There’s nothing more frustrating than seeing the market drop 30%, and not being able to take advantage of the lower share prices on offer.
Having a little bit of cash on the sidelines is always a good move, in my opinion. That’s particularly so if the stock market has had a strong run and valuations are high. That’s because dry powder gives you powerful options in the event that share prices fall and amazing buying opportunities emerge.
Those who, like Buffett, have cash ready to deploy now while share prices are low, are certainly in a good position.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.
Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)
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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.