Buffett's Cash Problem Isn't Your Problem

A quick note before I start. This week’s AAII Sentiment Survey reported among the lowest levels of optimism and the highest levels of pessimism in its 37-year history. There is ongoing uncertainty regarding tariffs, and more than half of all respondents to this week’s special question described the current state of the economy as mixed.

Historically, unusual sentiment levels have been contrarian signals, with the S&P 500 index outperforming during the six- and 12-month periods when bullish sentiment is very low. The relationship is not causal, but the pattern does exist. More details about this week’s survey results are shown below.

Berkshire Hathaway Inc. (BRK.B) ended 2024 with $330.8 billion in cash and U.S. Treasury bills. This is a very large amount in aggregate terms, bigger than the market capitalization of all but 25 S&P 500 companies.

Berkshire Hathaway’s combined cash and short-term investment balance accounts for 29% of its total assets. Only 27 other S&P 500 members have a larger cash/short-term investments allocation than Berkshire Hathaway, as shown in the table. (I excluded banks and investment banking firms from the table because of the different structure of their financial statements.) Even relative to other property and casualty insurance and reinsurance companies, Berkshire Hathaway’s allocation to low volatility assets is high.

Property and casualty insurance and reinsurance companies frequently invest the premiums they receive to cover future payouts to policyholders. Berkshire Hathaway CEO Warren Buffett called this a “money-up-front, loss-payments-later” model in his latest shareholder letter. The loss-payments-later part of the model requires such companies to maintain a proportionately larger allocation to low volatility assets than is needed by individual investors with long investing time horizons.

The model has “allowed Berkshire to invest large sums (‘float’) while generally delivering what [Buffett believes] to be a small underwriting profit.” This is why Berkshire Hathaway not only owns many businesses but also owns shares of many publicly traded companies. Buffett has continually invested premiums into higher-returning stocks as well as entire businesses.

Because Buffett has had a long history of successfully allocating capital, his company’s growing balance of cash and Treasury bills is drawing much attention. Buffett responded by telling shareholders, “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities.”

He then added, “Paper money can see its value evaporate if fiscal folly prevails … Fixed-coupon bonds provide no protection against runaway currency. Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry.”

So why so much in cash and Treasury bills? A lack of low valuations among large-cap stocks is the most probable reason. “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities,” wrote Buffett.

I purposely say large-cap stocks because Berkshire Hathaway’s sheer size makes it difficult to invest in any other type of stock. Buffett continues to acknowledge this size problem: “Berkshire’s present size, it should be underscored, diminishes [the ability to sell a stock when a mistake is made]. We can’t come and go on a dime. Sometimes a year or more is required to establish or divest an investment.”

Having too much money to invest is a problem for Berkshire Hathaway—and many portfolio managers. What’s problematic for them is good for us as individual investors. We can buy and sell quickly because we are putting less money to work. Our smaller portfolios (relative to institutional investors) allow us to pivot faster and invest in areas of the markets the big investors cannot.

Never underestimate this advantage.