This investing legend is holding onto over USD 300 billion in cash. Here’s what that means!

From the desk of Miles Everson:

Hi!

Every Wednesday, I talk about investing insights and strategies in the hopes of helping you build your wealth and attain financial freedom through this activity.

Today, let’s talk about the meaning behind this investing giant’s decision to hold onto over USD 300 billion in cash.

Curious to know more?

Keep reading below!

This investing legend is holding onto over USD 300 billion in cash. Here’s what that means!

Each quarter,  Berkshire Hathaway  provides everyone with a glimpse into Warren Buffett’s strategies when it releases information about its portfolio.

Investors pay close attention… especially when it’s about the firm’s cash reserves.

… and as of September 2024, Berkshire Hathaway is currently sitting on a cash pile amounting to a staggering USD 325 billion—the largest cash allocation in the company’s history.

At first glance, it might seem like Buffett is hoarding cash in anticipation of a market crash. However, it has never been his style to predict market moves.

Instead, the Oracle of Omaha focuses on  valuations  and adjusts his portfolio based on long-term expectations for returns.

Even with the market at all-time high valuations, Buffett isn’t betting on a huge downturn.

… but he knows how tough it is to find significant upside when valuations start at high levels.

So, to understand why Buffett is holding onto such a big amount of cash, we need to take a closer look at valuations.

There’s More to Valuations than Meets the Eye

The S&P 500’s Uniform price-to-earnings ratio is sitting at around 24x—one of the highest levels in history.

While it’s true that the market is overvalued when seen through this metric, valuations  should  be on the higher side.

As with so many aspects of the market, there are other factors at play as well such as inflation, tax rates, and real cash earnings growth.

Borrowing tends to be cheaper in a low-inflation environment, enabling companies to invest more in growth and business operations. Doing this tends to drive higher returns for corporations.

Meanwhile, favorable tax rates allow businesses to retain more of their earnings and reinvest all of that cash to boost long-term profitability, paving the way for higher returns.

Together, inflation and taxes shape how much it costs to do business, determining how much investors are willing to pay for earnings.

Inflation expectations are holding steady at 2% to 2.25% for the foreseeable future. Corporate tax rates today are also favorable.

With those trends in mind, the environment is perfectly suited for continued earnings growth.

Earnings growth is the key to bringing valuations back to average levels  without  any sort of stock market correction.

Also, the long-term corporate average valuation in similar periods has been around 20 times, as can be seen in the data chart below.

Said another way, valuations are higher than they should be, but that doesn’t mean they’re about to plunge.

Should corporate tax rates decline further or earnings growth accelerates, valuations could start coming down  without  stock prices taking a beating.

The bottom line?

Buffett knows this, and it’s probably why he has so much cash.

Again, it’s not as if he’s waiting for a crash; he’s just expecting valuations to come down to more reasonable levels, even as they stay elevated.

This strategy puts Berkshire Hathaway in a position to act when opportunities arise, whether it’s buying undervalued businesses or capitalizing on market dislocations.

… and by having so much cash, Buffett will be in a position to strike when others can’t.

Hope you’ve found this week’s insights interesting and helpful.

Stay tuned for next Wednesday’s The Independent Investor!

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