Berkshire Hathaway, the investment company of stock god Buffett, has cut more than 600 million shares of Apple and a large number of US bank holdings this year, raising its cash reserves to a record $325.2 billion (over NT$10 trillion) as of the end of September, and holding more US Treasuries than the Federal Reserve.
Many analysts interpret Berkshire's large cash holdings as a sign that "a market crash is coming." The massive cash-out is to allow cash to play a role in the bear market, so that they can buy cheap company stocks in bulk. After all, Buffett's stock sales have already cost Berkshire a lot of profits in the past few months.
Buffett's large cash holdings have market implications
Financial analyst Mark Hulbert wrote in a column on Market Watch yesterday (13th) that despite Buffett's denial, Berkshire's cash level may still have market timing significance. He tried to explain through historical data analysis why Berkshire's cash level and short-term holdings indicate that stocks are overvalued and prices are about to fall.
Hulbert said the chart plots Berkshire's cash and short-term investments as a percentage of the company's total assets and market value over the past 20 years.
In terms of company size, Berkshire's cash and short-term investments as of September were above average, but not at a record high. In fact, the historical high in terms of percentage of market value was over 35% in 2004, compared to 32% at the end of the third quarter this year.
Since Berkshire's cash level hit a record high in 2004, the US bull market has continued for nearly three years, but was then followed by the global financial crisis. Whether the 2004 reading is a successful or failed indicator of market timing depends on the length of your investment period.
Berkshire's cash level suggests the market may face long-term difficulties
Hulbert further pointed out that after measuring the correlation between Berkshire's year-end cash levels and the subsequent total returns of the S&P 500 index over the past 20 years:
There is no statistically significant relationship over a one-year period. But from a five-year perspective, there is a statistically significant negative correlation, in other words, Berkshire's higher cash levels are often accompanied by lower stock market returns, and vice versa.
Therefore, Hulbert concluded that in the long run, Berkshire's cash and short-term investment levels contain valuable information about the market's prospects.
Its near-record cash and short-term investment levels are sounding an alarm that the market may face difficulties in the coming years.
However, this does not mean that a bear market will come soon, as there was still nearly three years of US stock market bull run before the financial crisis after the 2004 peak.
Buffett's 20+ year record of avoiding tops and buying the dips
Next, let's review the stock god Buffett's history of avoiding tops and buying the dips over the past 20 years:
1999 tech bubble: Sticking to industries he doesn't understand
In 1999, the Internet bubble reached its peak, but Buffett stuck to his principle of "not making money outside of his competence," refusing to invest in unfamiliar tech stocks. Although he was questioned, he insisted on not participating in "games where others have an advantage over me," and believed that the US stock market valuation was significantly above economic growth at the time, and the performance of the Dow Jones Industrial Average over the next 17 years would not be much better than 1964-1981, unless the market declined.
The stock market once repeatedly slapped the face of the stock god in 1999, when the S&P 500 index rose 21% and the Nasdaq index soared 66%, Berkshire Hathaway's market value fell nearly 20%, the second worst performance since 1990, and Buffett was on the cover of Barron's at the end of that year, with an article titled "Warren, what's wrong?" saying "After more than 30 years of invincible investment success, Buffett may have lost his magic."
However, by March 2000, the Internet bubble finally began to burst, until it completely subsided in 2001, and Buffett successfully escaped the top.
2008 Financial Crisis: Others Fear, I Am Greedy
The global financial crisis broke out in 2008, with the Dow Jones Industrial Average falling 52% from its peak to its lowest point, with both technology stocks and industrial stocks plummeting across the board, but in the midst of market pessimism, Buffett published "Buy American. I AM." in The New York Times in October 2008, writing the classic quote "When others are greedy, I am fearful; when others are fearful, I am greedy."
In September-October 2008, Buffett began to buy the dips, buying large amounts of shares in Constellation Energy, Japanese automaker Tungaloy, Goldman Sachs, BYD, and General Electric, and Berkshire Hathaway's holding of Wells Fargo also acquired Bank of America for $15.1 billion.
After buying the dips, Buffett was also trapped for a while, with Goldman Sachs' stock price falling from over $125 to $53, and General Electric from $22.15 to $14.03, but the preferred shares Buffett bought all had a fixed annual return of 10%, so unless the company went bankrupt, he could still enjoy a handsome profit every year.
Five months after the publication of "Buy American. I AM.", the U.S. stock market began to rebound from the bottom, ushering in a 10-year bull market, and Buffett and Berkshire Hathaway's assets soared again, with the investments made during the financial crisis alone earning him over $10 billion in returns.
2020 Pandemic: Cash is King, Seize the Opportunity
In 2020, the COVID-19 pandemic broke out, global stock markets plummeted, and Berkshire Hathaway held a large amount of cash, seizing the opportunity to start investing heavily in the Japanese stock market, investing 1.6 trillion yen in the five major trading companies since 2020, which had increased to 2.9 trillion yen by the end of last year, with a profit of $8 billion.
Summary
In fact, Buffett has not always perfectly predicted the market top over the past 20 years, and has sometimes missed out on some investment opportunities, but Buffett's history of escaping the top provides valuable experience for investors. Although Buffett has not yet clearly stated that it is time to escape the top, the large cash reserves also show his cautious attitude in the face of market uncertainties.
Further Reading:Buffett's latest magic operation! Berkshire's cash exceeds the market value of Ethereum, reviewing his 20-year brilliant escape record
