In recent times, Warren Buffett has been continuously liquidating his holdings, and Berkshire Hathaway’s cash position in the third quarter has reached a record high of $325.2 billion, which is approximately 2.32 trillion Chinese yuan or 10.37 trillion Taiwanese dollars—the highest since 1990. Moreover, since 2018, Buffett has also stopped repurchasing his company’s own stocks.
“Why does Buffett keep increasing his cash holdings?” has become a hot topic in the investment community.
According to Berkshire Hathaway’s latest third-quarter institutional holdings report (13F), they have added two new stocks—Domino’s Pizza (DPZ.US) and Pool Corp (POOL.US), while significantly reducing holdings in companies such as Apple, Bank of America, Ulta Beauty, and Charter Communications.
After the recent U.S. election, the stock market saw a surge in the “Trump rally,” yet Buffett continues to adhere to the strategy of “cash is king” against the tide. This brings to mind his famous investment advice – “Be fearful when others are greedy, and greedy when others are fearful.”
So why is Buffett increasing his cash holdings? According to a report by The Wall Street Journal, Nicholas Colas, co-founder of investment analysis firm DataTrek, believes that Buffett may indeed think the current stock market valuations are too high, anticipating a deep correction or a full-fledged bear market.
It’s worth mentioning that the “Buffett Indicator,” which evaluates the U.S. stock market by dividing the total market capitalization by the GDP, has recently surged to 209%, indicating a serious overvaluation of the U.S. stocks.
The calculation of the “Buffett Indicator” is one of the best single market valuation indicators. Buffett once wrote that when the indicator is below 100%, it signifies reasonable stock market valuation, and entering at 70% or 80% could yield decent returns, but buying in at around 200% entails high risks.
Another possible explanation is that Buffett is waiting for investment opportunities. The investing giant might be considering acquiring large investment targets and is thus raising funds.
Buffett mentioned at Berkshire’s 2023 shareholders’ meeting, “What we really want to do is buy great businesses. If we can buy a good company for $50 billion, $75 billion, $100 billion, we will do it.” However, such good opportunities are limited, which may explain why Berkshire has not made significant investment outlays recently.
At present, Berkshire holds $325.2 billion in cash, allowing Buffett to acquire companies like Coca-Cola (market value of $280 billion) or purchase all publicly traded companies outside the top 25 in the U.S., including Disney, Goldman Sachs, Pfizer, General Electric, or AT&T.
Another possibility is that at 94 years old, Buffett may be approaching retirement, no longer actively managing investment portfolios, and aiming to leave enough investment funds for his successor.
One more explanation is that in May of this year, Buffett explained at the shareholders’ meeting that reducing Apple stocks was mainly due to tax considerations. With increasing tax pressures in the U.S., there could be a 21% capital gains tax. Berkshire has made substantial profits from Apple stocks and hopes to mitigate taxation through financial operations.
However, any significant investment decisions made by Buffett may serve multiple purposes, as he could be considering various goals simultaneously.