NYSE stock Berkshire Hathaway shares: Why Warren Buffett’s investment vehicle is sitting on the largest mountain of money in the company’s history

The fact that Warren Buffett’s investment company Berkshire Hathaway is sitting on the largest pile of money in the company’s history leads some market participants to suspect that the star investor considers the stock market to be overvalued. But what does Berkshire’s cash holdings actually say about the stock market?

• Berkshire’s cash balance is at its highest level in the company’s history
• Does Warren Buffett think the stock market is overvalued?
• Fluctuations in cash holdings are likely to have other reasons

Is the stock market currently significantly overvalued? If you believe some financial advisors, you might think so, according to MarketWatch. After all, star investor Warren Buffett’s investment vehicle Berkshire Hathaway currently has cash and short-term investments of more than $150 billion, the highest level in the company’s long-term history. This could indicate that Buffett is currently having a hard time finding undervalued companies to invest in and, as a result, the stock market may be overvalued.

Berkshire Hathaway’s cash balance is not unusually high

However, MarketWatch columnist Mark Hulbert points out that Berkshire Hathaway’s current cash balance isn’t particularly high because the company has grown over the years, so allocating a fixed percentage of cash automatically leads to a growing stock of cash and short-term investments. For example, while Warren Buffett’s investment company had a portfolio value of around $296.1 billion in the third quarter of 2022, there were around $313.3 billion in Buffett’s portfolio as of the reporting date on September 30, 2023.

While Berkshire Hathaway’s cash balance relative to the company’s total assets has not been consistent in recent years, a chart from Hulbert Ratings shows, it has fluctuated within a narrow range, according to Hulbert. While the average since 2011 has been 15.5 percent, the most recent allocation is 15.7 percent. Therefore, the amount, relative to the company’s total assets, is almost exactly in line with its historical average and could simply indicate that Buffett’s investment vehicle has grown in recent years.

No negative correlation to the S&P 500

The chart also shows the performance of the S&P 500 and the evolution of Berkshire Hathaway’s holdings of cash and short-term investments as a percentage of the company’s total assets. According to Hulbert, the chart does not show any negative correlation between Berkshire’s cash holdings and the performance of the market-wide S&P 500, which would exist if Buffett reacted contrary to the overvalued or undervalued markets. Instead, there has often been a positive correlation between Berkshire’s cash holdings and the S&P 500.

Fluctuations in cash levels have other reasons

According to Hulbert, this has nothing to do with bad market timing, since star investor Warren Buffett doesn’t believe in market timing anyway. Fluctuations in Berkshire Hathaway’s cash holdings are due to factors other than market timing. For example, the decline in cash allocations in 2022 largely reflects the acquisition of Alleghany for $11.6 billion in cash.

According to Hulbert, it is possible that Buffett currently believes the stock market is overvalued, but this cannot be concluded from the cash holdings of his investment vehicle Berkshire Hathaway alone.

Editorial team finanzen.net

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