The momentum in the US stock market seems relentless. After a 24% rise in the S&P 500 in 2023, the index is set to rise another 20% in 2024, despite some temporary setbacks earlier in the year.
Amidst this bullish backdrop, Jim Grant, editor of “Grant’s Interest Rate Observer,” issued a note of caution to investors.
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“We must not forget that all time (high), almost everything, price (for) earnings, price (for) book, price (for) sales, what have you, and do not forget that the biggest. equity investors are ready to share the balance sheet is 50-50, with more T-bills than stocks,” he said in an interview with Fox Business.
Grant was alluding to investing legend Warren Buffett, implying that Buffett’s pivot to safer assets like Treasury bills – short-term debt securities issued by the US Treasury with maturities of one year or less – could be a red flag for investors.
“When the biggest equity investors have more bills than equity, at least we’re encouraged to step back and say, if this is perfection, how do we improve it?” Grant warned, suggesting that investors consider the potential risk of an overheated market.
Buffett’s cash reserves
Buffett’s company Berkshire Hathaway has reduced stakes in several major stocks this year.
For example, in Q2, Berkshire sold 389 million shares of its top holding Apple (NASDAQ:AAPL), reducing its position by 49.3%. It also reduced its stake in Capital One (NYSE:COF) by 21.3%, shedding 2.65 million shares. Also, a more recent filing shows that Berkshire reduced its stake in Bank of America (NYSE:BAC) by 10.5% in Q3.
While Berkshire did make some purchases in Q2, it sold more than it bought, marking its seventh consecutive quarter as a net seller of stocks.
As a result, the company is sitting on substantial cash reserves. As of June 30, 2024, Berkshire’s cash, cash equivalents and short-term investments in U.S. Treasury bills totaled $271.5 billion.
Of particular note is the large sum Berkshire has allocated to Treasury bills. At the end of June, Berkshire held $234.618 billion in Treasury bills.
That’s more than the US Federal Reserve’s holdings of Treasury bills, which stood at $195.293 billion on September 25.
However, Buffett holds a larger position in the stock. At the end of June, Berkshire’s investments in equity securities totaled $284.871 billion, reflecting its continued substantial exposure to the stock market.
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Why does Buffett hold so much money?
Berkshire’s massive cash position raises the question of why Buffett didn’t pursue other investment opportunities. After all, as noted by Grant, Buffett is often called the world’s greatest investor. From 1964 to 2023, Berkshire had a remarkable total return of 4,384,748%, outperforming the S&P 500 which returned 31,223% over the same period.
Buffett has addressed the cash crunch, explaining his cautious approach during Berkshire’s annual shareholder meeting earlier this year.
“I don’t think anyone sitting at this table has any idea how to use it effectively, so we’re not using it,” he said, stressing that “we’re just swinging at the pitch we like.”
Buffett also expressed concern about future complexity, noting, “As the world becomes more sophisticated, complex and intertwined, more can go wrong.” He added that the company would be ready to “act when that happens.”
While some see Berkshire’s cash hoard as a defensive stance against a potential market downturn, others interpret it differently. Fund manager Chris Bloomstran told Business Insider that the situation is more than that.
He noted that Berkshire’s large insurance operations require sufficient cash reserves to cover potential payouts. Also, because of Berkshire’s size, the range of suitable investments is limited. Bloomstran points out that with Treasury bills offering good deals, Buffett can be patient.
“They are limited to only the 100 largest companies in the S&P 500 and maybe some international businesses that they can invest in,” explains Bloomstran. “So, the opportunity set is expensive, but he’s not thinking of getting 5.3% in the meantime, but that doesn’t mean in any way, shape, or form that the stock market is going to fall. He’s just trying to find a price that’s stable enough to make money. His world is limited .”
Of course, financial prudence has always been a cornerstone of Buffett’s philosophy. In a recent letter to shareholders, Buffett asserted that Berkshire “holds cash and positions in US Treasury bills beyond what conventional wisdom considers.”
This conservative approach could prove to be a significant advantage during the financial crisis. Buffett highlighted that during the 2008 financial crisis, Berkshire generated cash through operations, without relying on commercial paper, bank lines or debt markets in any capacity.
“We don’t predict periods of economic paralysis, but we are always prepared for one,” Buffett said, emphasizing the importance of maintaining liquidity in times of uncertainty.
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This article provides information only and should not be considered advice. This is provided without warranty of any kind.
