For decades, Berkshire Hathaway (BRK.A -0.52%) (BRK.B -0.77%) has been a reliable way to generate double-digit annual returns. The company’s leader, Warren Buffett, is one of the most successful investors of all time. By buying Berkshire stock, you essentially outsource your investment decisions to Buffett — historically a very wise move.
With a market cap of more than $1 trillion, many investors worry that it’s too late to buy Berkshire stock. Don’t be fooled. Berkshire stock is still an incredible investment for many reasons. But right now, it has a unique advantage that few alternative investments offer.
Berkshire is prepared for a market decline
Since the end of 2023, Berkshire has essentially doubled its cash pile. As of last quarter, the business held roughly $350 billion in cash. Buffett has pushed back on the idea that this growing cash pile represents a negative view on markets in general. “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” he wrote in his latest letter to investors. “Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities.”
None of these comments should come as a surprise. Berkshire was designed as an investment holding company, and holding equities over the long term is almost always preferred over holding cash. But the signal is clear: Buffett and Berkshire are having difficulties deploying its cash pile into attractive investment opportunities. If there were avenues for investment available, Buffett would undoubtedly deploy the cash.
There are only two reasonable expectations for Berkshire’s growing cash pile, which now comprises roughly one-third of the company’s entire market cap.
The first possibility is that Berkshire has grown so large that it can’t find large enough investments to move the needle. Buffett has noted in the past that if he managed only $1 million, he could generate 50% annual returns. But for a company as large as Berkshire, only massive companies can generate meaningful results. This limits Berkshire’s potential investable universe.
While this is a real phenomenon, Buffett could always deploy most or even all of this cash into a highly liquid index fund that tracks the overall market. The fact that he is not doing this means that he’d rather not tie these funds to the market as a whole — an overall bearish sign for broad market indexes.
The second possibility is that Buffett can’t find attractive investment opportunities in general. This is more likely than Berkshire being unable to find meaningful investment opportunities, because as mentioned, he could always buy a market index fund with high liquidity.
If Buffett can’t find good deals, it’s a good sign that there simply aren’t many bargains out there to be had. What do you want to have during a market decline? Extra cash, and boy, does Berkshire have plenty of that. By buying Berkshire stock today, your upside potential may be limited due to this cash balance. But in a declining market, this is exactly where you want to be. In fact, high cash levels have another advantage that could set you up for the next long-term bull cycle.
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Extra cash will help during the next bull market
Extra cash can insulate a portfolio during market declines. This cash also gives you the chance to invest in bargain equities at times when few other investors have extra cash to deploy. This is perhaps the best reason to load up on Berkshire stock today: The company’s huge cash pile can set it up for both a bear market and the next bull market.
Buffett is famous for his long-term investment philosophy, and over the decades, he has put his money where his mouth is. Many of his biggest holdings have been in Berkshire’s portfolio for decades. If equities decline in value across the board, expect Buffett to put all this cash into use, acquiring more shares of his favorite holdings.
Is Berkshire’s upside potential hampered a bit by high cash balances? Yes, but this cash also gives it plenty of flexibility. If you’re nervous about high asset valuations but want to make sure your money stays optimally invested, Berkshire remains one of your best options to bet big on.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
