Warren Buffett, Berkshire Hathaway cash balance should worry investors

Getty Images / Bill Pugliano

• Warren Buffett’s Berkshire Hathaway had $111 billion of
  cash on its balance sheet at the end of last quarter, the most
  in the company’s history.
• This is an ominous sign for the health of the market,
  and suggests that Berkshire Hathaway views it as overvalued and
  overly expensive.

As merger and acquisition (M&A) activity has roared, Warren Buffett and his investing
colleagues at Berkshire Hathaway have stayed on the sidelines.

That means they missed out on an M&A bonanza that saw a
record-breaking $2 trillion in deals through mid-May. But it also
means Berkshire Hathaway has set a record
of its own: It now has the biggest cash balance in the
firm’s storied history.

While that can be construed as good news for Buffett & Co. —
since they have a veritable war chest of capital ready for
deployment — it carries far starker implications for the overall
market.

That’s because Berkshire Hathaway’s reluctance to buy anything
can be viewed as a signal that just about everything is too expensive.
And considering Buffett is one of the most successful investors
in history, his market behavior should watched closely.

Berkshire Hathaway’s cash
balance has hit record levels as stock prices have done the
same.

AJ
Bell

With that said, it’s not exactly breaking news that Buffett
thinks few bargains exist. He said as much in his annual
letter back in February, saying that the lack of attractive
pricing “proved a barrier to virtually all deals we reviewed in
2017.”

What’s more notable is that Buffett has stood pat since then as
stocks have continued their grind higher. Valuations have only
gotten more stretched over that period, suggesting that an
already tenuous situation has worsened.

Russ Mould, investment director at AJ Bell, has taken notice.
He’s wary of the speculative deal fervor he sees accompanying
record stock prices.

“M&A tends to peak when animal spirits are running high and
often when executives feel their own shares are expensive enough
to make them a valuable acquisition currency,” Russ Mould,
investment director at AJ Bell, wrote in a client note. “Warren
Buffett is still having difficulty in finding value in US — and
perhaps global — stocks.”

Mould points out — and indicates in the chart above — that
Berkshire Hathaway’s cash balance has been an effective proxy for
market levels over history. As you can see, Buffett held
comparatively high levels of cash in the periods preceding the
last two market crashes, in 1999 and 2007.

So the question for investors now becomes whether to follow
Buffett to the sideline, or stay invested in a market that is, by
many measures, overextended. After all, the longer they wait, the
higher the likelihood they’ll be left holding the bag when things
go south. 

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