Buffett has no stomach for stocks in the current environment

Warren Buffett, the world's most successful investor in absolute terms, does not see many buying opportunities in the stock market right now. The investment company he runs, Berkshire Hathaway, has amassed a cash hoard of nearly $200 billion, according to the company's latest interim report. Buffett complains that there are no viable uses for that cash in today's market. But things can change. 

Here's a bit of context for the amount of money: the sum is roughly 2/3 of Nasdaq Helsinki's market value of about 250 BNEUR. Berkshire Hathaway has a total balance sheet of just over a trillion, or $1,000 billion. So almost a fifth of the balance sheet is cash. Or, to be more precise, "only" 35 billion of that is cash, and the remaining 153 billion is in "Treasury Bills," which are short-term US debt instruments with a maturity of less than a year. In practice, these are fully liquid assets.

Even the tech giants do not have similar war chests: Apple, for example, has more than $160 billion in cash and short-term and long-term debt. If you exclude cash-rich banks due to the nature of their business, more liquid assets can only be found in the US federal government, whose treasury account at the time of writing stands at over $900 billion.

At the AGM over the weekend, "the Woodstock festival for capitalists," as Buffett puts it, the massive cash pile once again raised questions. Buffett's honest answer was that no one in Berkshire's management knows how to use that cash productively. And that's why they're not using it now. They have the patience to wait for a better time.

This would be the case even if interest rates stood at 1%. But the current 5.4% short-term interest rate is certainly not hurting Buffett: the cash would generate about $10 billion a year in interest. No wonder he has praised Fed Chair Powell's monetary policy on several occasions! 

Buffett simply does not see sufficiently attractive opportunities in the market. This is not surprising, since Buffett has bought most of his stocks at 5-15x earnings. Now the entire US market is trading at 20x forecast earnings. Buffett sold a slice his stake in Apple in the spring for tens of billions of dollars, which also boosted the cash reserves.  Although Buffett thinks Apple is a stellar company, he too must be bothered by Apple's stock price of 26x earnings. 

Berkshire's bloated cash hoard and Buffett's comments represent a bearish view of the world's largest stock market from the world's most successful investor. 

As a mitigating factor, you might note that the problem is not new. Buffett has been complaining about the lack of investment opportunities for years. Berkshire Hathaway's cash has swelled from a post-financial crisis level of 25 billion (during the financial crisis it was put to so much use that cash reserves were cut in half) to its current level of just under 200 billion in 15 years, with a few brief dips. It's also worth remembering that the cash pile is never intended to be completely depleted. Buffett has indicated that at least $40 billion should be available for a rainy day in case of unexpectedly large claims in the insurance business.

Buffett also has what might be called the "first world" problem of the richest 0.1% of the world: the generous $30 billion annual free cash flow generated by the current business. You try to allocate that kind of money pile wisely.

Berkshire's massive size means that it needs a large investment in the size range of an elephant. Catching mice won't sway the conglomerate's numbers in any direction, although it's OK for Berkshire to own small pieces of fantastic companies. Not everything needs to be 100% owned. Ideally, it should be an investment worth hundreds of billions of dollars. The business should be stable and predictable. And the valuation should be cheap. In today's market, there are not many such candidates in the limelight, although Buffett has been attracted to the likes of big oil companies in America. Berkshire has a combined $40 billion stake in Chevron and Occidental Petroleum.

Berkshire Hathaway is excellently positioned for the next crisis in the market. During the financial crisis and its aftermath, Berkshire was able to leverage its large cash hoard and trusted reputation by borrowing or buying stakes in struggling companies such as Goldman Sachs and Bank of America. But since the financial crisis, the Fed has maintained ample liquidity and the market dips have not become deep and prolonged.

No one knows when the next dry spell will hit, but Berkshire has water for thirsty wanderers for a handsome fee.