In 2024, Berkshire Hathaway, Warren Buffett’s investment holding company, sold stocks worth $143 billion and made only $9.3 billion in stock purchases. The company also stopped repurchasing Berkshire Hathaway common stock, leading to a total cash reserve of $334 billion. This increase in cash holdings may be due to several factors:
1. Berkshire Hathaway sold $143 billion worth of stocks and currently holds $334 billion in cash.
2. Inflation is affecting the value of cash, but the company may believe it is a better option than buying overpriced stocks.
3. Warren Buffett’s decision to accumulate cash could be based on the belief that inflation will decrease or that the risk of holding stocks is too high.
As of the latest report, the inflation rate in the United States is 2.8%, resulting in a decrease in the real value of Berkshire’s cash reserves by almost $9.4 billion annually. This significant loss could indicate Buffett’s cautious approach to investing in a potentially uncertain market.
The current economic environment, influenced by factors such as tariffs and consumer behavior, may lead Buffett to anticipate a cooling-off of inflation. In addition, concerns about overvaluation in the stock market, particularly among large-cap companies, could have prompted Berkshire to sell off certain holdings.
Overall, Berkshire’s strategic move to accumulate cash amidst market uncertainties reflects Buffett’s conservative investment approach and readiness to navigate potential risks in the financial landscape.
With a price-to-earnings ratio of nearly 22 times, considered historically high, Warren Buffett may have legitimate concerns. In contrast, the S&P 400 mid-cap index and the S&P 600 small-cap index are trading below 16 times forward earnings, making them roughly 30% more affordable than larger stocks. This indicates that for investors considering purchasing stocks, opting for smaller, less expensive companies might be the wiser choice.
However, this presents a challenge for Berkshire Hathaway, valued at $1.1 trillion with $334 billion in annual sales, making it a significant large-cap company. Given its size, Berkshire would need substantial resources to drive substantial growth, likely necessitating the acquisition of entire very large companies. Yet, Berkshire finds many of these large companies overvalued and, therefore, unattractive for acquisition.
Warren Buffett acknowledged this dilemma in his 2023 shareholder’s letter, stating that only a few companies in the U.S. have the potential to significantly impact Berkshire’s performance, and they are already well-scrutinized and likely overpriced. This places Berkshire in a predicament where it must acquire large companies to make meaningful moves, yet risks overpaying and undermining its profits in the process.
The solution for Berkshire Hathaway seems to be holding onto cash and hoping that inflation rates do not devalue it more than the possible loss from purchasing an overpriced company. Conversely, for individual investors, the simpler solution is to avoid expensive large-cap stocks and focus on finding better value among cheaper mid-cap and small-cap stocks.
