Warren Buffett and I have more in common than you might think. Sure, we're from different generations and geographical regions. And Buffett is a lot wealthier than I am.
However, we both like Coca-Cola's soft drinks. We both like investing. Buffett focuses on the long term, and so do I. We even own several of the same stocks, including Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) itself.
And now we have something else in common. Here's why I just loaded up on Buffett's second-biggest holding.
Image source: The Motley Fool.
It's probably not what you think it is
Most people who are familiar with Buffett's investments know that Apple (AAPL -0.35%) ranks, by far, as the largest holding in Berkshire Hathaway's portfolio. Apple is my largest stock position too, by the way.
What is Buffett's second-largest position? It's probably not what you think it is. If you look at a list of Berkshire's equity holdings, Bank of America (BAC -0.21%) comes in second behind Apple. However, the bank actually isn't Buffett's second-largest position.
Berkshire's stake in Bank of America currently stands at around $31.8 billion. While that's enough to make it the second-biggest stock in the conglomerate's portfolio, it owns a lot more of another asset -- U.S. Treasuries.
As of March 31, 2023, Berkshire had nearly $104 billion worth of U.S. Treasury bills. The amount could be even higher now. Buffett told CNBC earlier this year that "the money comes in every day." He added that Berkshire continues to buy Treasuries "every Monday."
Why I'm following Buffett's lead
I have also invested heavily in U.S. Treasuries in recent weeks. Short-term Treasury bonds now rank as one of my largest positions. Why? For the same reasons that Buffett has so much money in them.
First, U.S. Treasuries are arguably the safest investment around. They're backed by the full faith and credit of the U.S. government. Sure, Fitch recently downgraded the long-term credit rating of the U.S. to AA+ from the highest level of AAA. However, that was mainly because of the political battles over increasing the debt limit, not because the U.S. government's ability to service its debt has declined.
Second, their yields are quite attractive. The six-month Treasury currently yields more than 5.5%. All Treasuries with maturities of one year or less offer yields of at least 5.37%.
Third, the stock market is overvalued nearly any way you look at it. The historical average for the S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio is around 15 or 16. The market is considered to be overvalued when the ratio tops 20. It currently stands at nearly 31 -- one of the highest levels in the last 50 years.
S&P 500 Shiller CAPE Ratio data by YCharts.
Buffett stated years ago that the ratio of the total market cap of the stock market to the gross domestic product (GDP) is "probably the best single measure of where valuations stand at any given moment." This metric became widely known as the "Buffett indicator." And it's also near its highest levels in 50 years.
US Total Market Capitalization as % of GDP data by YCharts.
On the same page
Buffett wrote to Berkshire Hathaway shareholders in 2022 that his "favored status" is to be 100% invested in equities. However, he keeps more money in cash and short-term U.S. Treasuries when stocks aren't attractively valued.
I'm completely on the same page as Buffett. Do I want to have so much cash invested in U.S. Treasuries? Nope. Stocks can generate much greater returns over the long run.
Granted, there are some stocks that aren't ridiculously expensive. I own several of them already. But I also think that it's just a matter of time before the market pulls back and provides great buying opportunities for many other great stocks. Like Buffett, I'll be ready with plenty of cash to deploy when that happens.
