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Warren Buffett's recent actions have many people concerned that Buffett is preparing for a 40% decline in the stock market. Buffett's cash pile just hit another record high hitting a staggering $325 billion. To put this number in perspective, this is enough cash to buy the entire companies of McDonald's, Starbucks, BMW, Delta Airlines, and Ford combined.
Today, Berkshire Hathaway, Warren Buffett's holding company, is keeping $325 billion of cash on the sidelines. For a company whose sole purpose is to be investing that cash into stocks and entire businesses. This has long-time followers of Warren Buffett extremely concerned. Many are interpreting this move as Buffett's way of preparing for an impending stock market crash.
The thought being that Buffett is aware of a significant decline in the stock market on the horizon and that Buffett is stockpiling cash ahead of this crash. This seems to contradict Buffett's claim of never trying to time the stock market. One of Buffett's most well-known quotes is, "I make no attempt to forecast the market.
My efforts are devoted to finding undervalued securities." If Warren Buffett claims he doesn't attempt to predict the stock market, why then do so many people interpret Buffett selling stocks and stockpiling cash as Buffett seeing danger ahead for the stock market? Well, let's just say despite claims to the contrary, Buffett has an incredibly impressive track record of predicting stock market declines.
Take a look at this chart here. In orange, you have the price of the S&P 500 index, broadly considered a proxy for the US stock market. On the gray bars, you have the cash pile at Berkshire Hathaway. As you can see here, Buffett has quite the impressive track record of piling up cash ahead of every major decline in the stock market.
He then uses that cash pile to take advantage of discounted prices to make some of his largest, most successful investments of his career. Take a look at the dot-com bubble of the late 1990s and early 2000s. Buffett grew the Berkshire cash pile to what was at the time record levels ahead of the bubble bursting.
In the year 2002, after the bubble had burst, Buffett made one of his most successful investments of all time, acquiring 90% of the shares outstanding of utility company MidAmerican Energy Holdings for $1.64 billion. The business has since been rebranded to Berkshire Hathaway Energy and is now estimated to be worth a staggering $90 billion currently.
If Berkshire Hathaway Energy was a standalone publicly traded company, it would likely be in the top 100 largest companies in the S&P 500 by market cap. No wonder Buffett considers this business one of the four {quote} crown jewels of Berkshire Hathaway. Then there is the great financial crisis. As you can see in the chart here, Buffett built up a massive amount of cash ahead of the stock market decline starting in 2007.
As the stock market plunged over the following few years, you can see Buffett spent down the cash pile going bargain hunting for great deals. This included buying the railroad Burlington Northern Santa Fe for a whopping $26 billion in 2009 during the height of the economic panic. BNSF is now worth an estimated $150 billion, putting Buffett's return on investment well above $100 billion.
Buffett's current cash pile makes these examples look tiny by comparison. At $325 billion, Buffett's cash pile is nearly seven times larger than the previous peak hit back in the 2006 to 2007 time period. You see, the storm that is currently brewing in the stock market traces its roots back to roughly 15 years ago to 2009.
March 6th, 2009 to be exact. On this date, the S&P 500 hit its low point, closing at 676.53, the lowest level since 1996. However, this day kicked off arguably the longest and strongest bull market in the history of global capitalism. The S&P 500 has nearly 10x since that low point hit in 2009 to over 6,000 as of the making of this video.
Starting in 2012, Buffett's cash pile has grown nearly every single month in lockstep with the incredible rise of the stock market as the bargains that made Buffett the greatest investor of all time increasingly became more difficult to find. There was a brief exception in the year 2022 when Buffett reinvested part of his cash stockpile back into the market.
In 2022, Buffett spent roughly $68 billion buying stocks, including 23 billion and 11 billion on oil and gas companies Chevron and Occidental Petroleum. However, this was just a temporary blimp as since then Buffett building up his cash pile. Even going as far as to sell $100 worth of Berkshire's holding in Apple, a position he previously said would never be sold.
Buffett is famous for being a long-term investor. He has said countless times his favorite holding period is forever. As Buffett knows that selling a stock at the wrong time is a huge investing mistake that costs investors a lot of money. If you are interested in seeing all six mistakes investors need to avoid according to Buffett, you can check out the downloadable PDF in the description of this video completely for free.
Get your hands on your free copy because it's my gift to you for supporting the channel. Now, part of the reason for this dramatic increase in cash is that Berkshire Hathaway, the company, is significantly larger than it was decades ago. In 1990, Berkshire's market cap was approximately $5 billion. dollars.
By the year 2000, that number had grown to 130 billion. In 2010, Buffett's market cap was pushing 200 billion dollars. Now, Berkshire Hathaway's market cap is roughly 1 trillion dollars. Because of the significant size growth of Berkshire Hathaway, it's not enough to simply look at the cash number in absolute terms.
To truly understand what Warren Buffett is thinking, you have to look at the cash pile as a percentage of Berkshire Hathaway's total assets. As of the making of this video, that cash holding stands at around 30%. Berkshire Hathaway's cash holdings represent about 30% of the entire company's assets. Comparing that 30% number to historical levels does nothing to alleviate concerns that Buffett thinks the stock market is overvalued.
Take a look at this chart of Berkshire's cash holdings as a percentage of total assets. As we can see here, that 30% number is the largest reading in the entire publicly available data set on Berkshire Hathaway, dating all the way back to the year 1990. The previous peak was 25% during the build-up to the Great Financial Crisis, a period of time where the S&P 500 went on to fall nearly 60% from its peak and took over half a decade to once again return to levels hitting during the peak.
Another way to look at Buffett's cash pile is to compare it to the amount of stocks that he owns. As of the making of this video, Buffett's cash pile stands at a staggering 325 billion dollars. Compare that to the approximate 300 billion dollars worth of stocks he owns as of the making of this video.
Warren Buffett is holding more cash than he has stocks. This is a shocking and radical divergence for Buffett, who claims that it is foolish to try to time the market. Take a look at this chart here showing Berkshire's investment portfolio broken down by stocks, aka equities in blue, cash in green, and fixed income, otherwise known as bonds, in red.
As we can see here, Buffett has historically held significantly more stocks than cash and bonds. That has all changed as of late. As you can see here, for the first time in decades, Buffett is holding more cash than he is stocks. If you are an avid follower of Buffett like myself, you know exactly why he is making this very uncharacteristic move.
Let me explain. Warren Buffett considers the single most important investment book, The Intelligent Investor, written by Buffett's mentor, Ben Graham. In this book, it lays out an investment principle that Buffett has adhered to ever since he was a college student in Ben Graham's classroom. This strategy is a large reason why Buffett has been so successful investing in the stock market.
This principle from The Intelligent Investor states that when stock prices and valuations are low, you want to have a very large percentage of your portfolio in stocks. However, as stock prices and valuations increase, you want to reduce your exposure to the stock market. Put another way, when the stock market is cheap, you want to have more exposure than when it is expensive.
Today, by historical standards, the stock market is expensive to say the least on seemingly every imaginable metric. One popular metric to determine whether the stock market is overvalued is to look at what is referred to as the cyclically adjusted price-to-earnings ratio. This is very similar to the regular PE ratio, but rather than using the most recent annual earnings data, the cyclically adjusted PE ratio looks at current stock prices divided by the average earnings over the prior 10 years.
By looking over a 10-year period, the cyclically adjusted PE ratio helps reduce the high volatility of the normal PE ratio caused by a company's profitability shifting dramatically from one year to the next. As you can see here, the cyclically adjusted your ratio is at a staggering 36.5, well above the long-term average of around 20 dating back to the year 1950.
Put another way, the current valuation of the US stock market is roughly two standard deviations above the long-term average, suggesting the stock market is in the strongly overvalued range. The most recent time the stock market was this overvalued was in 2021. The following year, the S&P 500 and Nasdaq index went on to have one of the worst years on record.
The S&P 500 fell by nearly 20% and the Nasdaq cratered by 33%. It's not just PE ratios showing the stock market is overvalued. Buffett's single favorite stock market indicator is flashing alarm bells as well. Buffett is such a big fan of this tool that it's even named after him. The so-called Warren Buffett indicator is calculated by taking the total value of the US stock market and dividing it by the size of the US economy as measured by GDP.
As of the making of this the total value of the US stock market was roughly 60.86 trillion. The most recent reading for the US GDP was 29.24 trillion. Dividing the value of the US stock market of 60.86 trillion by the US economy of 29.24 trillion, we get a Buffett indicator reading of 208%. But how does this compare to history is the real question.
Maybe it's 10% higher than the average, maybe 20% or if things are really stretched, how about 30%? Not even close. The Buffett indicator is a staggering 67% higher than the long-term average. According to the Buffett indicator, relative to the size of the economy, the US stock market has never been this overvalued in the entire 75 years this data has been tracked.
Put another way, the US stock market would have to fall by a staggering 40% from its current levels for it to be considered fairly valued using the Buffett indicator. Warren Buffett's philosophy is to buy wonderful businesses at fair prices. With today's stock market prices, it's no surprise that Buffett is having difficulty finding attractive investment opportunities.
Combine that with the fact that the yield that you get from holding cash is at its highest level in decades, this makes cash a relatively attractive alternative to the stock market for cautious investors like Buffett. This is a key investing principle from the Intelligent Investor. When the yield that you can get from cash is similar or even higher to the yield that you can get from stocks, you should have a larger percentage of your portfolio in cash.
As you can see on this chart, for the first time since the dot-com bubble, yields on cash now exceed earnings yields from owning stocks. When this last happened more than 25 years ago in the dot-com bubble, it took over a decade for the stock market to recover to levels hit during the peak of the bubble.
Ultimately, only time will tell if investors today will experience another lost decade of stock market returns. However, based on Buffett's actions, things aren't looking so promising. If you're interested in learning more about Warren Buffett's approaches to investing, I put together a completely free Warren Buffett investment checklist that you can download at the link in the description.
Make sure to check it out because it has already helped thousands of people just like you learn about how to invest like Warren Buffett. Additionally, since you made it this far in the video, it is obvious that you are serious about learning about investing. With that being the case, make sure to check out this video here on Warren Buffett and the storm brewing in the US real estate market. I will see you over there.
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