Atlantic Edge Insights
December 2024
Warren Buffett's Cash Pile
"We only swing at pitches we like"
- Warren Buffett
The S&P 500 grew by more than 20% in both 2023 and so far in 2024. While these strong returns were supported by growth in corporate earnings and a strong economy, a portion of the returns came from multiple expansion, an increase in a stock’s P/E ratio to levels far above average, meaning that most stocks are more expensive relative to the profits they make. Against this backdrop, many investors noted, with reasonable concern, that Berkshire Hathaway (headed by Warren Buffett) had quickly grown its cash position to $325 billion, almost 30% of Berkshire Hathaway’s total assets. This year alone, the company’s cash position doubled, primarily by selling $133 billion more in stocks than it purchased. When asked to explain the decision to hold cash, Buffett replied, “We only swing at pitches we like.”
Cash as a Percentage of Overall Assets for Berkshire Hathaway
-
Buffett’s decision to hold more cash is rooted not in a prediction of an impending market crash, but instead in a lack of compelling investments for large company stocks.
-
While we agree with Warren that many large companies in the US, particularly technology companies, range from expensive to very expensive, we believe there are still reasonable stocks to invest in the US that offer strong profit growth at reasonable prices. The area of the stock market we find most attractive is mid-size US stocks, an area that Warren doesn’t often invest in due to scale, as Berkshire is worth over $1 Trillion. Another differentiating caveat, Warren does not share the same concern over tax consequences for Berkshire Hathaway as we do for our clients.
-
Expensive markets can often be vulnerable to bad news, resulting in a setback in stock market performance. If the market experiences a valuation correction, the most expensive stocks will likely decline more than reasonably valued stocks (like investors experienced in 2022). While we remain invested across the entire stock market, focusing on companies with more attractive valuations should provide better risk adjusted returns and mitigate losses if stocks lose value.
Atlantic Edge Insights
Matthew Cochran, CFA
Robert Filosa, CFA
Ethan Caldarelli, CFA
Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy.
We are happy to provide a second opinion analysis of your portfolio
