Widely considered the greatest investor of all time, Warren Buffett and his firm Berkshire Hathaway draw constant attention from the broader stock market. Now, with the Oracle of Omaha set to step down as the company's CEO after about six decades on the job, investors are going to be scrutinizing Berkshire's last few quarters of the year extra carefully.
Warren Buffett and his team have never been afraid to sit out when they feel the market is too frothy or invest in stocks that go against the grain. While most investors have piled into a bull market now well into its third year, Berkshire has been hoarding hundreds of billions in cash and only holds a few of the Magnificent Seven stocks that consume much of the broader benchmark S&P 500. Does Buffett know something that Wall Street doesn't?
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Is Berkshire hoarding cash for a recession or preparing new management?
At the end of the second quarter, Berkshire's cash, cash equivalents, and short-term U.S. Treasury bill holdings amounted to nearly $340 billion, down slightly from the first quarter. Berkshire has been growing its cash pile for many quarters now. While some investors may have been relieved to see Berkshire purchase some stocks in the second quarter, the company still seems to be hoarding.
Up until earlier this year, many investors assumed that Buffett and his team wanted no part of the stock market, which has been hitting new all-time highs all year and trades at a stretched valuation. But with Buffett stepping down, it's possible that Buffett wanted to position incoming CEO Greg Abel from a place of strength with the strong cash buffer, as the company makes this monumental transition.
NYSE: BRK.B
Key Data Points
Additionally, with Buffett no longer involved in the day-to-day operations of the company, Berkshire may not be able to take as many luxuries as it once did. Investors may more or less demand that Berkshire begin paying a dividend, something that's never happened under Buffett.
Of course, it's also still likely that Buffett and team are concerned about the market and don't want to overly invest in stocks while they trade at high multiples, or want to have a war chest ready if the economy falls into a recession, in order to take advantage of opportunities. Buffett is a value investor and actually has a good track record of heading to the sidelines before market fallout. Avoiding big drawdowns has likely contributed to Berkshire's success just as much as buying winners.
Avoiding the Magnificent Seven fits with strategy
With Buffett and Berkshire still on the sidelines right now, it makes sense that the company hasn't loaded up on Magnificent Seven stocks set to benefit from the artificial intelligence revolution. Sure, the consumer tech giant Apple is still Berkshire's largest holding, but Berkshire first bought the stock in 2016 and has actually sold significant chunks in recent years. Berkshire also owns a small position in Amazon.
As of this writing, the Magnificent Seven stocks made up over 33% of the S&P 500. Their large market caps and valuations are responsible for pushing the overall market to new highs and stretched valuations. While Buffett and his team are likely interested in these names, they are also very disciplined when it comes to valuations.
Additionally, Buffett and his team may have concerns over the sustainability of the AI revolution. Even if demand continues to be through the roof, there are a lot of other extraneous factors, including whether there is enough AI infrastructure and energy to drive this data-intensive sector. Even before the internet changed the world, investors still had to work through the DotCom Crash. It's hard to say whether there will be another crash, but you can bet Buffett and his team will want to avoid one of these market collapses at all costs.
Buffett and Berkshire have decades of experience. They won't reach during boom times and they won't be swayed by perma bulls. If there's something that Buffett knows that Wall Street doesn't, it's the ability to think about an entire economic cycle, remain patient, and not be tempted by irrational exuberance.
