Warren Buffett's Hidden Warning to Investors for 2024

This is Warren Buffett, the best investor the world has ever seen. This is the list of his top 10 stock holdings as of our last update on the 30th of June 2024. As we know, we get these updates every 3 months thanks to a very handy SEC filing called the 13F. But take a look at this. This is also the top 10 holdings of Warren Buffett's Berkshire Hathaway on the 31st of March 2024. Here's the list of companies back on the 31st of December 2023.

It's worth noting that out of the 41 companies that make up the total Berkshire Hathaway portfolio, these top 10 stocks hold 90.46% of the weight. As you can see, he hasn't really been adding anything to this list over this year. But why? Why has the world's best investor stopped dead in his tracks? Interestingly, he turned into a massive seller of stocks, more so than a buyer. Does he see some sort of stock market pain on the horizon?

For those that don't know Warren Buffett that well, as an investor, he is the world's best value investor. That means he only buys stocks when he feels as though he's getting the shares at a fair value. He's not in the business of speculating that an overvalued stock like Nvidia might go higher. He waits for an economic event that sends the shares of high-quality businesses down and then buys in at what he considers a fairer valuation.

With this in mind, the biggest reason by far that Warren Buffett has been relatively sitting on the sidelines across the last few years is due to a lack of opportunities caused by an expensive market. "We only swing at pitches we like, and it's just that things aren't attractive." There are certain ways that can change, and we'll see whether they do. I mean, take a look at the S&P 500 right now; we're seeing practically all-time high after all-time high. The stock market has been on a massive bull run since late 2022.

The Shiller PE tells us a similar story, up around 37, when historically, it should be down between 18 and 20. Just broadly, the stock market is quite hot, and that's an issue that hits value investors hard. Even going back to 2019, before the pandemic, Buffett was struggling with finding great opportunities back then. Saying, "In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good. Prices are sky-high for businesses possessing decent long-term prospects."

We continue, nevertheless, to hope for an elephant-sized acquisition. So, even back then, he was struggling. For someone like Buffett, periods of market overvaluation affect him a lot more than they do say you and me because of Berkshire's size. You know, because Buffett is looking to invest 5, 10, 15 billion dollars at a time, even maybe more. This limits how many businesses he can take a stake in without owning more than 10% of the company, the threshold at which he's considered an insider and a lot more regulatory requirements apply.

He addressed this in his most recent shareholder letter, saying, "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't, and if we can, they have to be attractively priced. Outside the US, there are essentially no candidates that are meaningful options for capital deployment at Berkshire."

All in all, we have no possibility of eye-popping performance. He puts it simply a little bit earlier in the letter, saying, "Size did us in. There have been times in my life that I've been awash in so many opportunities that I could have invested everything by nightfall. Then there are other times when the year goes well. Not in the early days, but now we haven't seen anything that makes sense that moves the needle."

There is a genuine underlying reason why Buffett, of recent times, has been buying less and less big positions. The market has been overvalued, yes, but also for Buffett, the sample size to choose from has been very, very small. That has led the Berkshire Hathaway cash pile to balloon to a whopping $76.98 billion. So, 50% cash, 50% stocks, and that's obviously excluding the wholly owned businesses that Berkshire also has.

But compare that to say, 5 years ago, back at the end of Q2 2019. Berkshire's cash position sat at $122.32 billion, representing 63% invested and only 37% on the sidelines. That cash pile really is growing to monstrous levels. Now, sitting on $168 billion of cash, which you told us today is now more than $182 billion. His questions are: one, what is Buffett waiting for? And two, why not at least deploy some of it?

Well, I think that's pretty easy to answer. I don't think anybody sitting at this table has any idea of how to use it effectively, and therefore we don't use it. Now at 5.4%, but we wouldn't use it if it was at 1%. Don't tell the Federal Reserve that. So, the number one reason for the accumulation of the cash pile is a lack of opportunities.

But there is another factor at play right now, which was what Warren was talking about at the end of that clip there, and that's treasury bonds. Surprisingly for treasury bonds, this is actually where things get really interesting. But before we talk through that, I wanted to tell you about this week's video sponsor, which is TrainWell.

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As Warren mentioned in that last clip, beyond a lack of opportunities at the current time, US Treasury bonds are playing a big factor in his investing drought. Buying treasury bonds is simply the process where you loan your hard-earned dollars to the US government, and then they give you a modest annual interest return for doing so.

Now, in investing, there's a whole lot of assets you can sink your money into. As you can imagine, they fall along a line of least risky to most risky. The least risky, of course, is cash. Then you have things like term deposits, market-tracking ETFs, real estate, individual stocks, and then things like crypto or a night at the Bellagio on the other end of the scale.

But one investment that is extremely close to the risk profile of cash is the US Treasury bond. That's because the only way for the investment to fail is for the US government to default, i.e. not be able to pay their debts, which is an incredibly unlikely scenario. But US Treasury bonds do give the investor better returns than cash, which actually sits there, slowly losing its value thanks to inflation.

What you end up getting is investors—or even companies like Berkshire Hathaway—that have cash lying around, keeping that money invested in short-term US Treasury bonds. Here's the thing: over the last few decades, that really hasn't been a great investment because interest rates have just been so low. You didn't get much interest on your government bonds back in, say, 2020, when interest rates dropped to nothing.

Today, however, you can get substantially more bank for your buck by even holding very short-term US Treasuries. This is the chart for the 3-month treasury bond, and at the current time, the yield is around 4.2%. What this means is that the opportunity cost of having a lot of cash on the sidelines is much lower. You don't feel as bad with money on the sidelines; you don't necessarily get that feeling that your money is just sitting there losing value because if you invested in treasury bonds, well, 4.5% actually isn't that bad. Sure, it's not the highest return you've ever seen, but it's not too shabby, right?

This is exactly what's happening in the Berkshire portfolio. Have a look at this chart, which plots the amount of US Treasury bonds Berkshire holds as a percentage of their total cash pile over time. You can see that now, with interest rates higher and treasury bonds paying better, the amount of money they have in Treasury has risen. When you add the stock portfolio in there as well, you can see that as Buffett has sold off stocks, that money has gone right into those safer treasury bonds.

This was a point that was heavily emphasized during the coverage of the Berkshire Hathaway shareholder meeting earlier this year. I guess you have to think of it as what would he put new money into that gets over that hurdle of 5%? 5.4%? Yeah, you got to get more than 5% that you can earn in treasuries in a very safe environment.

Now, that 5.5% return that Becky mentioned has cooled to more like 4.5% today, but the point still stands. At the end of the day, if Buffett can't find really great opportunities in the stock market to put that extra cash towards, keeping most of it in treasury bills isn't going to punish him all that much.

So that is the second reason why Buffett hasn't been buying stocks over the past year or so. But there is one more reason that we should definitely discuss. Now, as you know, Buffett really isn't a market timer, right? He's not in the business of picking the right times to jump in and out of the market. "We have no way, no attempt made to predict markets. We have no attempt made to pick stocks."

But what I found really interesting listening to him talk live in Omaha in May earlier this year was that he was very clear that he honestly didn't mind holding more cash and selling down some of his large positions. Quote, "With everything that's going on in the world at the present time..." Listen to his exact words on the topic: "But I don't mind at all under current conditions building the cash position. I think when I look at the alternatives available in the equity markets and I look at the composition of what's going on in the world, we find it quite attractive."

After factoring in the composition of what's going on in the world, he finds holding cash quite attractive. I think this is probably the closest sound bite we are ever going to get of Warren Buffett potentially suggesting that something could very well be brooding on the horizon.

There's a very big national debt problem in the United States. You've got countries like China and Russia trying hard to diversify away from the dollar. There's, of course, a trade war between the US and China. There are two major land wars happening right now in Ukraine and also in the Middle East. There's inflation in the western world, fears of recession in many major economies globally. There's just a lot going on.

Of course, Buffett would never be caught making a prediction, and we should never base our investment decisions off of speculated future macroeconomic environments or events. But it is interesting to hear him say that with all that's going on in the world, he really doesn't mind the reality that his firm is sitting on a large pile of cash.

"We do it better this time around than 2008/9 if something akin to that happened, but it won't be exactly like 2008 or 9; you can be sure of that. But you can also say that there will be times when having huge sums available extremely quickly—maybe it'll be once every 5 years, maybe it'll be more like once every 10 years or something—will be crucial.

As the world gets more sophisticated, complicated, and intertwined, more can go wrong. There's no sense going through here exploring the possibilities of the different things that could happen, but you do want to be able to act when it happens. This strategy worked for Buffett back in 2008 when he invested $5 billion in Goldman Sachs and $3 billion in General Electric. Having that money on hand quickly during the crisis ultimately helped him make a lot of money on both of those investments.

So, it really isn't about timing the market; it's really just not doing dumb things in overvalued markets. Buffett sees the overvaluation, but he's not worried. He'll hold that big wad of cash; he's not getting overly punished by doing so. With treasuries at 4.5%, while he doesn't expect anything, if something should go bang in financial markets as a result of all that's happening in the world today, he's also in a prime position to cash in on any big deals that might arise.

Overall, that's the reason why Buffett hasn't been buying very much over the past year and also why Berkshire's cash balance is so high. But there is one more thing I did just want to mention, though, and I don't think this gets spoken about enough when Buffett's cash position is quoted. That's that we have to remember he runs an insurance company.

People forget that a massive chunk of Berkshire Hathaway is just insurance businesses. When it comes to insurance, you really do need a massive war chest for the inevitable big one that causes a lot of claims to be made at the same time; we're talking a massive hurricane, a flood, a bushfire, for example, here in Australia.

Now, of course, insurance companies get to choose how much they want to play with fire in terms of how much they keep on the sidelines to cover themselves for this potential scenario happening. But obviously, this is Warren Buffett we're talking about, and he is obviously hellbent on keeping Berkshire an absolute financial fortress.

He said in the past that at least $30 billion of Berkshire's cash is absolutely untouchable, but I would even hesitate to guess that he's upped that number over the past few years. So it's not a big thing in the context of a $277 billion cash position, but it's worth considering nonetheless.

With that said, please let me know what you think down in the comments section below. Big thanks again to TrainWell for sponsoring this video. You can learn more about that in the description or the pinned comment below. As a reminder, the first 100 people to sign up with my TrainWell link will get 14 days free plus $25 off their first month.

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With that said, guys, thanks very much for watching, and I'll see you all in the next video.