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Berkshire Hathaway's Cash Pile Reaches Record Levels. Why?

Last week, Warren Buffett once again made headlines for his "wholesale" stock sell-offs. The latest quarterly report revealed that Berkshire Hathaway continued to reduce its stock holdings, with its cash reserves reaching a record high of $325.2 billion, up 17.4% from $276.9 billion at the end of the second quarter.

Measured against the company's total assets, Berkshire now holds approximately 28% in cash, the highest proportion in many years. Some investors are nervous about Buffett's massive cash hoarding, interpreting it as his bearish view on U.S. stocks.

 Is there a relationship between Buffett's cash reserves and the trend of the stock market?

Since 2000, there appears to be a positive correlation between Buffett's cash position and the performance of the U.S. stock indices, with the highest correlation seen with the Dow Jones Industrial Average. This indicates Buffett's contrarian approach to the market—accumulating cash when the stock market rises and buying stocks when it falls, seemingly confirming his famous saying: "Be fearful when others are greedy, and greedy when others are fearful."

Specifically, Buffett massively sold off U.S. stocks around 1969, 1987, 1999, and 2007, each of which was followed by significant market crashes. From November 2007 to March 2009, both the $NASDAQ(.IXIC)$   and the S&P 500 plunged by over 50%. Afterward, Buffett successfully capitalized on the market bottom and became the world's richest person for the first time in 2008.

Over the subsequent decade, Berkshire's cash position remained at a relatively low level of around 16%, while the U.S. stock market continued to rise, maintaining Buffett's average annual return above 20%, navigating through bull and bear markets.

Today, with Buffett's cash ratio reaching a historical peak, it's possible he harbors concerns about the market conditions. At the annual shareholders' meeting in May this year, Buffett partly attributed his sale of Apple stocks to his anticipation of higher future tax rates. Additionally, he mentioned his desire to provide more flexibility for his successor after stepping down, suggesting that accumulating sufficient cash might be a preparation for this transition.

Is the reason for Buffett's cash holdings different this time around?

Holding nearly $325.2 billion in cash doesn't imply that Berkshire Hathaway can invest the entire amount even if a sufficiently large investment opportunity arises.

Chris Bloomstran, fund manager of Semper Augustus, said, "I consider about half of that cash to be legitimately deployable."

This limitation is due to the substantial cash reserves required by Berkshire Hathaway's extensive insurance operations, which need to cover potential insurance payouts.

Jim Shanahan, an analyst at Edward Jones, suspects that the partial sale of stocks might be related to the death of Vice Chairman Charlie Munger last year, as the sell-off began shortly after his passing. "Buffett's sale of Apple stocks is partly because he is not as comfortable with technology companies as his partner Munger was, but the main reason is that Buffett has always been a conservative investor."

The persistently high U.S. bond yields are also a reason for Buffett selling off $Apple(AAPL)$   stocks. Berkshire's holdings in short-term debts reached $288 billion in Q3, even surpassing the Federal Reserve. Over the past two years, U.S. bond yields have remained around 5%, providing substantial returns on Buffett's massive capital. He himself has admitted that U.S. bonds continue to offer attractive returns; with a lack of better investment options on the market, "we only swing at pitches we like."

Bloomstran stated that Buffett is confined to investing in perhaps the 100 largest companies in the $S&P 500(.SPX)$   and a few international businesses. His range of investment opportunities is pricey, yet he is comfortable earning a 5.3% return in the interim. This does not suggest that a stock market crash is imminent in any way. He is simply seeking opportunities to invest at great prices that are stable enough. His investment universe is limited.

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