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What is Warren Buffett telling stock and ETF investors with his large cash hoard?

At Berkshire Hathaway’s recent annual meeting, Chairman and legendary investor Warren Buffett said he currently does not see attractive investment opportunities for their $189 billion cash hoard, which he expects to rise to $200 billion soon. That enormous cash pile is 13% higher than last quarter, 45% higher than a year ago and 70% higher than two years ago. Also telling is that last quarter Buffett sold over $17 billion in stock, including 13% of their Apple stake.

Remarkably, Buffett essentially admitted he prefers holding cash to more Apple stock by saying, ”Unless something dramatically happens that really changes the capital allocation strategy, we will have Apple as our largest investment. But I don't mind at all, under current conditions, building the cash position.”

He bluntly explained the reason for their large cash position as follows:

“We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money. I don’t think anyone at this table has any idea of how to use it effectively, and therefore we don’t use it. We only swing at pitches we like…today things aren’t attractive. We’re not using it at 5.4%, but I wouldn’t use it at 1% either. But don’t tell the Federal Reserve that. When I look at the equity markets and the composition of what’s going on in the world, we find cash quite attractive. It isn't like I have a hunger strike or something like that going on. It's just, things aren't attractive and there are certain ways that can change. We'll see whether they do.”

Of course, Buffett kissed the ring of the most powerful economic central planner in the world while also warning about the dangers of the enormous Federal deficits and debt saying, "Jay Powell is not only a great human being, but he's very, very wise man. But he doesn't control fiscal policy…That’s where the trouble will be if we have it.”

We agree about the coming trouble due to out-of-control Federal fiscal policy, but we disagree that Jay Powell is a “very, very wise man” since he expected the highest inflation in 40 years to be “transitory” after increasing the money supply by 40%. Buffett is being “politically correct” by bashing politicians while praising central bankers.

Buffett also shared some thoughts about the current worrisome situation regarding both nuclear weapons and artificial intelligence (AI):

"Last year, I said we let the genie out of the bottle when we developed nuclear weapons and that genie has been doing some terrible things lately and I don't know how to get the genie back in the bottle. The power of that genie is what scares the hell out of me. And AI is somewhat similar.”

Buffett is clearly telling investors that now is not a good time to invest in stocks given the combination of all-time high stock market valuations, higher interest rates and a challenging economic, geopolitical and fiscal outlook. This is exactly what we at Bull And Bear Profits have been warning investors about.

Buffett Focuses On Long-Term Returns…So Should You

As Berkshire Hathaway has become very large, it has become harder and harder for Buffett to beat the market. Over the past decade the total return of the S&P 500 exceeded that of Berkshire by nine percentage points.

At 93 years old, Buffett is the wealthiest investor in the world with a net worth of $139 billion. He doesn’t need to prove anything or worry about funding his retirement, to say the least.

But Buffett is very consistent in his investment philosophy and he does not waver in his convictions. While he has many different ways of making money, including merger arbitrage and other special situations, every investment he makes is one where he sees good value and lots of upside potential. For his long-term investment holdings such as Apple, American Express and Coca-Cola, Buffett estimates the term (10 years or so) return potential of the stock at any given point in time. He typically only buys a stock if he can expect at least 10% annual long-term returns based on his growth and valuation estimates.

Myth: Buffett Is Not A “Market Timer”

It is a myth that Buffett does not “time” the market. The reality is Buffett understands when the stock market is undervalued or overvalued and he invests accordingly.

For example, Buffett closed his investment partnership in the late 1960s due to “sky-high” stock valuations, driven by heavy speculation in technology and conglomerate stocks, which made it difficult for him to find investments that met his valuation criteria. As a result, he believed it would be impossible for him to achieve the returns he had earned in the past. The subsequent decade was the worst for the stock market since the 1930s.

Then after the 1973-1974 stock bear market, the worst since the 1930s, Buffett noted the attractive valuations of stocks by saying he felt like an “oversexed guy in a whorehouse.”

Then in 1999, at the top of the Dot-Com Tech Bubble, Buffett penned a famous article for Fortune magazine, warning that market returns would be much lower than in the prior 17 years saying:

“Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%.”

A decade later, the S&P 500 was over 50% lower.

The chart below shows Buffett has repeatedly built up Berkshire’s cash balances before major stock market and economic declines — which he sees coming when high valuations coincide with aggressive Fed interest rate hikes — and then used that cash to make investments at much lower valuations. This includes before the bear markets of the early 2000s, 2008-2009, 2020 and now.

Buffett cash

This shows Buffett follows his advice to “be fearful when others are greedy and greedy when others are fearful.” Buffett, in his usual folksy way and with the huge increase in cash balances, is telling us a major recession and stock bear market are coming. That sounds very familiar to us.

Stock Market Valuations Are Near All-Time Highs

Buffett has said the ratio of the total US stock market valuation to GDP is “the best single measure of where valuations stand at any given moment".

The research of economist and fund manager John Hussman shows that a similar, but even better, valuation metric for estimating long-term (12-year) annual returns for the S&P 500 is the ratio of nonfinancial market capitalization to corporate gross value-added, including estimated foreign revenues. As shown below, this ratio is near the highest levels in history and only modestly below the highs seen at the stock market peaks in 2021 and 1929.

Hussman valuation

Source: Hussman Strategic Advisors

Based on these extreme valuation levels and 100 years of history, likely total annual nominal returns over the coming 12 years is negative 5%. That means the S&P 500 is likely to fall over 50% over the next 12 years!

Investment Implications

When Warren Buffett speaks, wise investors listen. Buffett is literally putting his money where his mouth is and telling investors the stock market is overvalued, difficult economic times are coming and much better valuation levels will be coming in the future. In short, he is saying now is the time to be fearful…when valuations are better after the coming bear market, it will be time to be greedy.

LONG-TERM RETURNS WEBINAR

For much more detail on estimating long-term returns, please see our Members-only webinar titled “BULL AND BEAR PROFITS STEP 1: ESTIMATING LONG-TERM RETURNS”. This is the first of four webinars where we discuss in detail our four key steps for profiting in bull and bear markets. This webinar focuses on historical and current valuation levels for the four major asset classes: bonds, commodities, REITs and stocks. We use these valuation indicators to estimate long-term (10-12 years) returns for these asset classes.

Understanding how to estimate long-term returns and knowing what those estimates are, which even most professional investors do not know, is incredibly powerful in helping you build conviction to prepare for and profit from bull and bear trends in all assets. It is available in the “BULL & BEAR WEBINARS” page here: https://bullandbearprofits.com/Education/Bull-and-Bear-Webinars.aspx