Warren Buffett And The Market Crash Bogeyman

Two recent articles got me thinking about how much cash Warren Buffett is really holding via Berkshire Hathaway (BRK.A)(BRK.B).

  1. Is Warren Buffett Leading Investors Or Misleading Investors?
    (Gary Gordon)
  2. Don’t Forget To Copy Warren Buffett’s Biggest Position
    (Houman Tamaddon)

I think both articles are valuable but they also indicate that Buffett is hoarding more and more cash, and therefore perhaps we should do the same.

As Gordon states:

He is not adding meaningfully to current positions. He is not putting billions to work in new positions or acquisitions. On the contrary, while the typical investor has never had more confidence in putting his/her cash into riskier assets like stocks, Mr. Buffett has never had more of his money sitting in the safety of low yielding cash.

To that, we need to include what Tamaddon says:

Berkshire’s cash position has been steadily rising since 2008. What is more remarkable is that in 2008, cash accounted for only 22% of Berkshire’s book value. In the latest quarter, that percentage has grown to 33%.

When you take these together, the central idea is that because Buffett is hoarding more cash, maybe we should do the same. I also want to add that this is supported by Buffett’s biographer:

Schroeder says that one of the most important things she learned from many years of studying Buffett and his holding company, Berkshire Hathaway, is that he perceives cash as a call option with no expiration date or strike price.

Again, the idea is that since Buffett loves cash so we should also love cash. At a minimum, cash will keep us safe. While this might be true, perhaps there’s more at play here. We’ll review that in a moment.

I think many investors have a nagging feeling that the market is overheated. Therefore, if we have more cash, then when the crash comes we’ll soak up fallen stocks as the blood runs in the streets.

Before I go on, I need to say that I think cash is great. However, my central point in showing several charts below is to simply point out that Buffett isn’t “secretly” hoarding cash but he also isn’t spending like crazy. Instead, he’s just acting rationally and in line with his past behavior.

In the first chart from Gordon’s article we see the cash pile growth from June of 2008 through 2017.

And, I think it would be prudent to add in Tamaddon’s Cash-to-Equity chart for the same period of time. Take a look here:

In both of these charts, we definitely get the feeling that cash is growing. In fact, the cash is literally growing over time. The data is irrefutable!

And yet, there’s one missing piece to the puzzle. While it’s true valuations keep going up and up, so it’s harder and harder for Buffett to buy, I don’t think this cash hoarding is anything special. It’s rational, it’s normal.

First, I don’t think that a lack of bargains is the only reason Buffett’s holding cash. Second, I don’t think Buffett’s only holding cash as an option on the future. Sure, both of those reasons are rational but there’s a third chart I’ve been looking at that provides additional clarity. Take a look:

Chart

BRK.A Market Cap data by YCharts

Hopefully the point is pretty clear here. But, for the sake of additional clarity, let’s look at the last 5+ years in a different way.

I’m using Tamaddon’s chart data, which he pulled from Berkshire’s 10-Ks and 10-Qs. For the market cap data, I’m just using YCharts end-of-year data, and the current $ 462B, which is directly above.

Here’s what I’m seeing:

In other words, the story that Buffett is deliberately holding more and more cash to be safe doesn’t hold the same water. Preparing for a market drop? That just doesn’t make as much sense to me in light of the data above.

If you look at Cash to Equity it does seem to look like more and more cash is being held. However, if you look at Cash to Market Cap, Buffett isn’t doing anything special. It’s simply business as usual.

Just to be abundantly clear, I’m making the point that we cannot look at the Berkshire Cash hoard and conclude that Buffett is preparing for a collapse. It looks to me like he’s doing what he’s always done, and he’s not trying to predict the future.

So if Buffett isn’t hoarding cash to protect from a collapse, do we have any clues about what he is thinking based on what he’s said and done recently? Yes, in a limited sense. There are two things.

First, valuations make sense if interest rates stay historically low. This runs contrary to the idea that hoarding cash is the best path forward. As usual, finding the right companies to buy at the right time is the name of the game.

Second, he isn’t holding back on buying (e.g., Pilot Flying J). Again, it’s still a matter of finding great businesses. Per usual, Buffett appears less concerned with macro events than with just finding opportunities. As Berkshire grows, investing cash does get harder for Buffett. So, cash will keep building due to the law of large numbers.

I believe it’s a stretch to guess that Warren Buffett is deliberately hoarding cash to protect Berkshire. Occam’s razor tells me that it’s all about big size and shrinking opportunity, not a market crash bogeyman. Besides, Cash to Market Cap is steady as she goes and smooth sailing.

To wrap up, I think both Gordon and Tamaddon are making great points. It’s true that Buffett’s cash pile is growing. At the same time, I don’t see any real change in Berkshire, or Buffett’s approach. Sure, the difficulty applying that cash continues to increase, but the psychology and philosophy hasn’t changed. The Cash to Market Cap view of Berkshire over the last 5+ years supports this “business as usual” conclusion.

Disclosure: I am/we are long BRK.B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Stella Densmore