- Berkshire Hathaway is sitting on a record $189 billion in cash.
- There’s no reason to worry about an impending stock market crash, according to one fund manager.
- “Everyone works out and makes a big deal about it, but it’s not that big of a number,” Chris Bloomstran said.
Berkshire Hathaway recently released its first quarter results, and like clockwork, a swarm of bearish investors pointed out that Warren Buffett was sitting on a record $189 billion pile of cash. .
The implication, these commentators say, is that the stock market will soon see a significant jump because Buffett sees no value in investing his company’s large sums of cash at today’s sky-high valuations. This means that there is a high possibility of a decline.
In fact, this couldn’t be further from the truth, says Semper Augustus fund manager Chris Blomstran. The firm manages about $550 million in assets and counts Berkshire Hathaway among its largest positions.
In a recent interview with Business Insider, Blomstrand said there are more nuances to Berkshire Hathaway’s largesse, including that Buffett is bearish on the stock market and that a stock market crash is imminent. He explained that it does not necessarily reflect that idea.
“Everyone gets excited and talks a lot about it, but it’s not that big of a number,” Blomstrand said.
Putting Berkshire’s cash pile into perspective
Rather than measuring Berkshire Hathaway’s cash position in absolute terms, investors should measure the cash pile as a percentage of Berkshire’s total assets, Blomstran said.
And Berkshire Hathaway’s current cash position is 17.5%, roughly in line with its long-term average when measured against the company’s total assets. Since 1997, Berkshire Hathaway has kept cash on its balance sheet at an average of 13% of assets, according to Bloomstran.
Another way to look at Berkshire Hathaway’s cash position is to measure it against the company’s market valuation, which paints a similar picture. Berkshire Hathaway’s $189 billion in cash is actually at a fairly normalized level, well below its 2004 peak of nearly 40%.
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Berkshire Hathaway needs to hold on to cash
Just because Berkshire Hathaway has nearly $200 billion in cash doesn’t mean it can invest all that cash once it finds a large enough target.
“If you think about cash, about half of it is legally deployable,” Blumstra said.
Because Berkshire Hathaway operates a large insurance business, it needs sufficient cash reserves to cover potential insurance claims.
Buffett has said Berkshire Hathaway will maintain about $30 billion in permanent cash reserves to cover potential insurance claims, but Bloomstran has taken a more conservative approach. has added about $50 billion to its reserve levels for a year’s worth of potential insured losses.
“Thus, we call $82 billion more or less a permanent cash reserve,” Blomstran said in his annual letter to investors, leaving Berkshire Hathaway with about $110 billion left to invest. He said that.
Berkshire Hathaway’s investment scope is narrow
Because of Berkshire Hathaway’s size, only a handful of the companies it invests in actually move the needle for the conglomerate.
Combine that with the fact that cash equivalents like short-term Treasury bills are yielding more than 5%, and Buffett and company are working overtime to find the right investment at the right price, which could come at any time — as it did in the first quarter of 2016 when Berkshire first invested in Apple.
At the time, the S&P 500 was trading near record highs, Apple was the world’s largest company, and Berkshire Hathaway’s absolute cash pile was reaching record levels. None of these factors, while still present, prevented Buffett from making one of the best investments in Berkshire Hathaway’s history.
“His ability to invest is limited to probably the 100 largest companies in the S&P 500 and perhaps a small number of international companies. So the opportunities he has set up are expensive, but he will earn 5.3% in the interim. That doesn’t mean a stock market crash is imminent in any way, shape, or form, he’s just trying to find a nice price that’s stable enough to leverage his capital. ” Blomstran said.
In summary, investors shouldn’t take a bearish view of the stock market just because Berkshire Hathaway has a record amount of cash.
In Buffett’s own words:
When asked, “What is Buffett waiting for?” about Berkshire’s pile of cash at this year’s annual shareholder meeting, the legendary investor replied:
“I only swing at pitches I like.”
