Why Warren Buffett is Keeping $144B out of the Stock Market

How many times on the channel have I regarded Warren Buffett as the best stock market investor to have ever lived? I've said that a lot, and he is. He took over Berkshire Hathaway in 1965, and since that time, his regime of acquisitions and investments has led to a 20.1% return every year for Berkshire shareholders versus the S&P 500's 10.5%.

But doesn't it seem a little bit strange that the world's best stock picker has 144 billion dollars worth of cash sitting on the sidelines, literally doing next to nothing as it sits in either short-term treasury bonds or in a bank account? I mean, for context, that sum of cash is almost equal to his position in Apple, which is the biggest investment in his portfolio, valued at 161 billion dollars at the start of the year.

With ultra-low interest rates naturally inflating the market between 75 and 80% in the last five years, this has led many value investors to wonder: "Warren, why do you hold so much cash? Do you think a crash is imminent? Are you trying to time the market? Or more worryingly, have you lost your touch?"

Well, over the past month or so, we've got some really interesting new information from both Buffett and his longtime business partner Charlie Munger as to exactly why the Oracle of Omaha has been stashing his cash and also Warren Buffett's 52 billion dollar workaround that has largely gone unnoticed.

So with that said, let's roll the intro and discuss.

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So I've seen a lot of comments around the internet lately from people saying things like, "I'm staying in cash right now because look, even Warren Buffett doesn't want to buy stocks in this environment. His cash pile is just growing and growing and growing."

After having really delved into the weeds of Warren Buffett's investing situation, this actually isn't the correct takeaway from his current cash position. To cut to the chase: Warren Buffett is not trying to time the market; he's not trying to avoid the stock market right now. It’s just that he is really struggling to find investments that he can put considerable amounts of money towards.

We first got an inkling of this being the case a few weeks back when Buffett's longtime business partner Charlie Munger said this at the Daily Journal shareholder meeting: "What are your thoughts on going to cash today and waiting for better opportunities to deploy that cash over the next 12 months? Is it a sensible idea in your mind?”

He responded, "My whole adult life I've never heard of cash waiting for better conditions. I've just invested in the best thing I could find, and I don't think I'm going to change now."

And the Daily Journal's used up its cash now; Berkshire has excess cash, quite a bit of excess cash. But it's not doing that because it thinks it knows how to time investments; it just can't find anything he can stand by. And of course, when he says Berkshire, he really means Buffett.

That was the first bit of evidence explaining why Buffett's cash pile was so big coming into 2022. But then, just last week, we got Warren Buffett's annual letter to Berkshire shareholders, and this year he actually took the time to explicitly discuss the enormity of Berkshire Hathaway's cash pile and why it is like this.

So bear with me here, but I want to read you exactly what Warren Buffett has said about this issue. He said, "Berkshire's balance sheet includes 144 billion of cash and cash equivalents, excluding the holdings of the railroad and energy businesses. Of this sum, 120 billion is held in U.S. Treasury bills, all maturing in less than a year. That stake leaves Berkshire financing about half of one percent of all the publicly held national debt."

Also, side note: how crazy is that? Warren Buffett, or Berkshire Hathaway, is literally financing like 0.5% of all national debt of the United States! That is pretty crazy.

Charlie and I have pledged that Berkshire will always hold more than 30 billion of cash and cash equivalents. We want our company to be financially impregnable and never depend on the kindness of strangers or even that of friends. Both of us like to sleep soundly, and we want our creditors, insurance claimants, and you to do so as well.

So essentially, 30 billion of that 144 billion cash pile is completely untouchable. But hey, that still leaves 114 billion dollars. So what's up with that? Buffett goes on and says, "But 144 billion? That imposing sum I assure you is not some deranged expression of patriotism, nor have Charlie and I lost our overwhelming preference for business ownership. Indeed, I first manifested my enthusiasm for that 80 years ago on March the 11th, 1942 when I purchased three shares of City Services preferred stock. They cost was 114.75 and required all of my savings. The Dow Jones Industrial Average that day closed at 99, a fact that should scream at you: never bet against America."

"After that initial plunge, I always kept at least 80% of my net worth in equities. My favorite status throughout that period was 100%, and it still is. Berkshire's current 80% or so position in businesses is a consequence of my failure to find entire companies or small portions thereof that are marketable stocks which meet our criteria for long-term holding. Charlie and I have endured such cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent. And fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital."

Read on, and we'll get to that in a second. But there you have it, straight from the horse's mouth: Warren Buffett is really struggling to find companies to invest in at this moment in time.

Oh, ha! He's lost his touch; he's not the investor he used to be! I knew it! Well, that's not entirely fair either. You see, Buffett is in a really tricky position because we know his four-pillar approach: understand the business, ensure it has a moat, ensure the management is top quality, and then buy the shares well below their intrinsic value.

Well, at the moment, there's practically no high-quality companies in Warren's circle of competence that are firstly large enough to attract an investment from Berkshire and then trading at a margin of safety price. We all know that Warren is not someone to start violating his proven four-pillar approach just to try and get a little bit more money into the market now when valuations are just ridiculous.

So what does this mean? It means that, naturally, the cash pile continues to build up. But as a long-term investor, ask yourself this: does that really matter? I mean, if you zoom out and you look at a 20 to 30 year time period, if you are going to simply buy low and sell high, doesn't it make logical sense that during the highest of high bull markets we naturally have more cash on hand and then at the lowest of low markets as opportunities are plentiful we have less cash?

To me, the more you look at it from a long-term perspective, the more obvious Buffett's cash pile looks. It's not a function of trying to time the market; it's just a function of following that rational long-term strategy while being in a very high market. But no doubt it's still a pain in the butt, right?

We are investors, and we want to be invested. These kinds of market conditions are awfully painful to sit through. Well, luckily for Buffett, over the past year or so, he has been able to deploy some of that cash into the market in actually a very large way, and I call it Buffett's invisible investment because if you look at a 13F filing, you won't see it anywhere. But in fact, this investment has now grown to 51.7 billion dollars over the past two years, and it is, of course, share repurchases.

So on this, Buffett says, "There are three ways that we can increase the value of your investment. The first is always front and center of our minds: increase the long-term earning power of Berkshire's controlled businesses through internal growth or by making acquisitions. Today, internal opportunities deliver far better returns than acquisitions; the size of those opportunities, however, is small compared to Berkshire's resources."

"Our second choice is to buy non-controlling part interests in the many good or great businesses that are publicly traded. From time to time, such possibilities are both numerous and blatantly attractive. Today, though, we find little that excites us, and of course, that's what we were just talking about before. That's largely because of a truism: long-term interest rates that are low push the prices of all productive investments upwards, whether those stocks or apartments or farms, oil wells, or whatever."

"Then our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses that Berkshire owns, and when the price-value equation is right, this path is the easiest and most certain way for us to increase your wealth. Periodically, as alternative paths become unattractive, repurchases make good sense for Berkshire owners."

"During the past two years, we therefore repurchased nine percent of the shares that were outstanding at year-end 2019 for a total cost of 51.7 billion. That expenditure left our continuing shareholders owning about 10 percent more of all Berkshire businesses, whether it's the wholly owned businesses such as BNSF or Geico or the partly owned businesses such as Coca-Cola and Moody's."

So if you owned Berkshire Hathaway two years ago, then over time, as Buffett uses up Berkshire's cash to buy back Berkshire shares and delete them or clear them off the table, your percentage ownership of the business goes up. You know, the pizza is still the same size, but now it's divided up into fewer slices. But the amount of slices that you hold hasn't changed, meaning that your slices are now more valuable; they account for a higher percentage of whatever pizza is left in front of you.

So essentially, if you owned 10% of Berkshire two years ago, now you own 11%, and you've had to do absolutely nothing for it. So overall, they are the reasons behind Berkshire's huge cash pile and also the sneaky way that Buffett has still been able to put some of that money to use.

So, summary: no, he's definitely not timing the market. He's just got limited businesses to invest in that will actually move the needle for Berkshire, and right now out of those businesses, none of them meet all four of his investment criteria.

Meaning, naturally, you know the cash pile grows, but better that I reckon than making mediocre investments or mediocre deals in a very speculative market.

But anyway, guys, that will just about wrap things up. Thanks very much for watching! I hope you enjoyed it, and I hope you got something out of the video. Of course, leave a like on it if you did enjoy or if you found it useful. Subscribe to the channel if you're new around here. Check out Profitful; that's my business, link down in the description below if you're interested in learning the full Warren Buffett approach.

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All right, Cash Buffett, let's go here! Cash Buffett!