Warren Buffett follows a routine. He gets plenty of sleep each night. He wakes up at the same time each morning. He drinks a can of Coca-Cola to kick off the day. He reads voraciously, including newspapers and companies' financial reports.
But Buffett is now doing something for the first time in 20 years. And it could be concerning to many investors.
Image source: The Motley Fool.
Hoarding cash
It's not unusual for Buffett to keep a large amount of cash on hand for Berkshire Hathaway (BRK.A 0.34%) (BRK.B 0.23%). The company's policy is to maintain at least $30 billion in cash, cash equivalents, and U.S. Treasuries.
However, Buffett is currently hoarding cash like never before. Berkshire's cash position, including cash equivalents and short-term investments, totaled nearly $277 billion as of June 30. That's the highest level ever.
BRK.B Cash and Short Term Investments (Quarterly) data by YCharts
Granted, Berkshire Hathaway is generating greater earnings than it has in the past. It has more money to sock away. Also, inflation has eroded the buying power of the U.S. dollar so a larger cash position makes sense to some extent.
But there's another sign that Buffett's current level of cash stockpiling is unusual. Berkshire's cash position has increased more than 65% so far in 2024. It grew over 30% in 2023. The last time the conglomerate's cash, cash equivalents, and U.S. Treasuries rose by 30% or more in back-to-back years was in 2003 and 2004.
Time to worry?
It's not hard to figure out why Buffett is holding on to so much cash. He prefers to be more heavily invested in stocks but will buy stocks only when they're attractively valued. The fact that Buffett has built Berkshire's cash position to such a large level reflects his belief that most stocks are not valued attractively.
Buffett is almost certainly right that many stocks trade at a premium. One of his favorite valuation metrics, known as the Buffett indicator -- the ratio of the total U.S. stock market value divided by GDP -- is near its all-time high. In 2001, Buffett wrote in a Fortune essay, "[N]early two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal."
Should investors worry? I think that's too strong of a word to use. Buffett's increase in Berkshire's cash position by 30% or more in back-to-back years two decades ago didn't lead to a near-term market meltdown. The S&P 500 rose over the next two years.
Also, the Buffett indicator is arguably less useful now than it was in the past, with technological innovations making it more challenging to accurately assess what their valuations should be. We should note as well that Buffett is still buying some stocks in the current environment.
Follow Buffett's lead
I think the best thing for investors to do right now is to follow Buffett's lead. When you find stocks of well-run companies that are available at a reasonable price, buy them. Build a solid cash position if you don't already have one. Having plenty of dry powder on hand will enable you to buy stocks at a discount when the stock market inevitably pulls back.
Most importantly, maintain a long-term perspective. Buffett's success is due in large part to his mindset. Thinking long-term is a part of his routine that every investor should adopt.
