Warren Buffett, chairman and founder of Berkshire Hathaway, is known as the “Oracle of Omaha” and is one of the richest and most respected businessmen in the world. Through Berkshire Hathaway he is holding a ton of cash right now. The amount of cash has increased to $128 Billion by the third quarter of 2019 compared to just over $40 billion in 2013. Berkshire’s stock performance may be lagging the S&P 500 over the last few years because of it but Buffett is willing to take that lost opportunity in order to be ready to take advantage of buying opportunities if there is a recession or a market correction in the coming years. He likely sees stock prices as too high right now compared to the value of the underlying companies. The “Buffet Indicator” and other measures he reviews to get a sense of whether the market is appropriately valuing companies support the conclusion that stock prices are too high right now.
Buffett is not a timer of markets and his stockpiling of cash does not mean a recession or market correction is imminent. In fact, Buffett has held onto most of his stocks and businesses (as he generally does) and he is increasing his cash position by electing to keep the cash that these investments earn. I’ve done the same thing with my portfolio – instead of immediately reinvesting dividends or other distributions I am increasing my cash position over time so that if the market sees a significant drop I will have some cash to purchase undervalued investments.
The Average American Takes the Opposite Approach
In comparison, a recent CNBC article reported the results of a survey that asked American investors if they wanted to change any of their investment decisions from 2019. The number 1 answer – they wanted to invest more of their money. The number 2 answer – they wanted to invest more aggressively. Why? Because they saw the strong returns in 2019 from investing in stocks and they regret missing out on those returns. Based on the survey responses, the average American investor may invest more and more aggressively in 2020 to compensate for the missed opportunity in 2019. Unfortunately, we know that as markets continue to go up the average person finally gets ready to jump in and participate –but they often jump in at the tail end of a growth cycle and they get hammered when the market corrects. These same people often sell and contribute to the price drops that other people with cash take advantage of.
Be Like Buffett
Buffett has been criticized for having so much cash and second-guessed by pundits that calculate how much he could have made if his cash had been invested in the stock market over the last few years. He has even lost some shareholders because of his approach. I applaud his resolve and I think there are lessons we can take from what Buffett is doing:
- Continue to save at aggressive levels but consider increasing your cash position so that you can buy that stock, home, rental property, or other investment when the markets drop and others are panic selling.
- If you have seen a big returns from your stock portfolio and it is a significant part of your investment portfolio, consider locking in some of those gains and increasing your cash position or putting it into an investment that is uncorrelated to the stock market. I’m not recommending you exit your stock positions completely but you should consider hedging your bets. If you know the saying “pigs get fat, hots get slaughtered” you will understand the recommendation.
I had almost no cash in my advisor-managed portfolio in early 2019. It’s now at over $50,000 in cash and half of the dividend portfolio that I manage is held in cash or short-term bonds. These cash balances will continue to grow until the next bargain comes along so I can be ready to pay in cash. I hope you will be ready when the time comes to buy some undervalued assets.