When it comes to sky-high market valuations, Warren Buffett doesn’t have to speak. His mountain of cash does all the talking.
“Sky-high” was the exact phrase Buffett used to describe market prices earlier this year.
In spite of hoping to make an “elephant-sized acquisition” — another Buffett phrase — Berkshire’s Hathaway’s cash pile has swelled to a record-busting $128 billion.
In its most recent quarter, Berkshire also booked its highest ever operating profit, at $7.86 billion. That means more cash on the books, making the mountain a little bit taller.
With so much cash coming in the door at Berkshire, there is apparently nothing to do with it. Too much cash is a wonderful problem to have, but it’s still a problem. And Buffett’s last “elephant-sized acquisition” was in 2016, when he purchased Precision Castparts for $37.2 billion.
Some Berkshire Hathaway investors are growing impatient. “What is he waiting for?” this crowd seems to say. They want Buffett to go ahead and buy something, rather than letting the cash sit idle.
Berkshire Hathaway has, in fact, been buying back its own shares here and there — $700 million worth in the third quarter — but compared to a $128 billion cash hoard, that is merely a drop in the bucket.
Some wonder if Buffett is preparing for the inevitable transition to new leadership. After all, he turned 89 years old in 2019. Charlie Munger, his longtime investing partner, is 95.
Others think Buffett is holding out for a recession or a market crash, waiting to see the pendulum swing before pouncing on a new purchase. This would fit past buying patterns spread across multiple decades.
For example, in the depths of the 1970s bear market, Buffett scooped up shares in the Washington Post. After the 1987 market crash, Buffett backed up the truck on Coca-Cola shares. And in the aftermath of the 2008 financial crisis, he made some hugely favorable financing deals.
Those who wish Berkshire would quickly deploy its cash should perhaps be careful what they wish for.
If precedent is any guide, Buffett is waiting for things to get ugly — which means stock prices and private market valuations falling sharply. If this is the case, he isn’t predicting the timing or magnitude of such an event so much as getting ready for it.
Then, too, one of the best ways to prepare for a seismic shock is to have — drum roll, please — a large slug of cash on hand. That is exactly Buffett’s situation now.
TradeSmith Research Team
