Berkshire Hathaway (BRK.A 0.37%) (BRK.B 0.64%) has never had more cash than it does now. At the end of the first quarter, the conglomerate led by CEO Warren Buffett had over $189 billion in cash and short-term investments on its books.
The buildup of that cash stockpile has some concerned that it might be a silent warning to the stock market. After all, if Buffett isn't putting that cash to work, there must not be many good deals in the market. But are they right?
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Is Buffett sending a warning about valuations?
Berkshire Hathaway is well-known for its massive stock portfolio (now worth around $376 billion), which includes holdings in Apple, Bank of America, American Express, Coca-Cola, and dozens of other companies. Buffett has a legendary track record, delivering annualized returns of around 20% since taking over as CEO of Berkshire Hathaway. For that reason, investors eagerly follow Berkshire's stock moves, and notice when its cash pile swells up.
Berkshire Hathaway likes to make strategic acquisitions of undervalued companies, and having a sizeable quantity of cash on hand provides it with the flexibility to act when opportunities arise.
Buffett and his team don't chase growth stocks. Instead, they look for quality companies that are trading at reasonable valuations. They may be signaling a cautious approach to the market, which could make sense given the price of stocks today.
The Shiller P/E ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, compares the current price of the stock market to the average inflation-adjusted earnings of the past 10 years. This longer look-back helps smooth out fluctuations and provides insight into stock valuations historically.
S&P 500 Shiller CAPE Ratio data by YCharts.
This ratio now is nearly 33, suggesting that stock valuations are quite stretched relative to most periods in U.S. history. In that context, it makes sense that Berkshire Hathaway has been taking a more measured approach to investing.
It's worth noting that the market's valuations have been elevated for several years now (the longer-term average CAPE ratio is 17.5) -- that isn't a reason to sell all your stocks today. Other factors, like interest rates, fiscal policies, and economic growth also play a role, and high valuations could persist for a long stretch of time.
The cash stockpile isn't unusual from a historical perspective
Although Berkshire Hathaway's cash position has never been larger, it's important to put that into perspective -- its market capitalization and assets have also never been larger.
Today, cash and short-term investments account for about 17.7% of Berkshire's total assets. Over the past 25 years, that ratio has averaged around 17.1%. So relatively speaking, compared to the conglomerate's recent history, this level is pretty normal.
Fundamental Chart data by YCharts
The size of its cash pile is more about Buffett and his team's patient approach to investing. A large cash pile gives the company flexibility, providing quick access to cash to scoop up shares or acquire companies outright if there is a market crash.
Berkshire also has large insurance operations through its ownership of GEICO, Alleghany, and General Re, so it's wise for it to have a cash pile available to resolve claims in case its insurance operations experience a nasty year and face significant payouts.
Berkshire is getting paid to hold cash
Holding a lot of cash during times of elevated inflation can be problematic because inflation erodes the dollar's purchasing power. However, Berkshire has capitalized on the higher interest rate environment by putting $153 billion into short-term U.S. Treasury bills.
Because Treasury bills are highly liquid and backed by the U.S. government, Berkshire can put its cash to work this way and collect interest at little risk. It's getting more for Treasury bills than it did in the past, and today, the three-month treasury rate is 5.46%.
3 Month Treasury Rate data by YCharts.
Stay the course
Berkshire Hathaway has never had more cash on hand; that is a fact. However, that cash stockpile relative to its total assets isn't out of the ordinary. Also, it is taking advantage of higher interest rates and is essentially getting paid to wait, so it probably feels little need to rush into stocks at today's valuations.
But make no mistake, long-term equity investing is the way to go. According to Crestmont Research, for more than a century, the S&P 500 has been consistently positive over any 20-year look-back period you can pick.
So, while today's higher-than-normal valuations may be concerning, conditions like this happen from time to time as the stock market and the economy ebb and flow. What's important for investors is to remember to stay invested in high-quality companies that can withstand the test of time and consistently grow your portfolio over the long haul.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
