Why is Warren Buffett stockpiling cash?

Warren Buffett is viewed by many as the greatest investor of all time. Since taking the reins of Berkshire Hathaway in 1965, Buffett has outperformed the returns of the S&P 500 index by an astonishing average of 9.5% p.a. 

So, when Buffett sells down stocks in his investment portfolio, it's noticed by analysts and investors everywhere. 

However, the reason why he is selling isn't exactly clear. Even his latest shareholder letter provides few clues. To date, all Buffett has said is that he's taking advantage of lower capital gains tax rates because he believes they may rise in the future.  

There's likely more to it than that. But before we delve into what that might be, let's look at what he's been selling. 

Berkshire's cash pile 

Buffett has always ensured that Berkshire is never short of cash. Not only does he value the flexibility that cash gives him,  but he believes "you always want to have enough [cash] so that nobody else can determine your future." 

But, as this graph shows, Berkshire's cash pile has ballooned over the past several quarters, rising to $US334bn at the end of the December 2024 quarter. 

Source: Flourish 

The stock that Buffett has primarily been selling over the past 12 months is Apple, though this selling paused in the December 2024 quarter. Buffett has also sold down stakes in other companies such as Bank of America. 

However, Buffett continues to buy stocks where he sees value. One recent example is a $US1.24bn stake in Constellation Brands, which sells beer, wines and spirits. 

4 possible reasons for Buffett's cash stockpile

So, why has Berkshire built this massive cash pile? I believe there are four possible explanations. 

1. An over-exposure to Apple 

Buffett began buying Apple stock in 2016 when it was trading around $US25 a share and within two years he had amassed just over one billion Apple shares (split adjusted).  

By the end of 2023, Apple's share price had soared to around $US190, resulting in Apple becoming 50% of Berkshire's equity portfolio. 

Buffett then hit the sell button. Over the next three quarters, he sold 605 million Apple shares, booking a massive profit and swelling Berkshire's cash pile. 

So, given Buffett's favourite holding period is 'forever', what changed in Buffett's mind with regards to Apple? Here are three possibilities. 

The first is concentration risk. If an unexpected negative event hit Apple, Berkshire was exposed. With the recent sell down, Apple is now a more reasonable 28% of Berkshire's equity portfolio. 

The second reason Buffett may have lost interest in Apple is that revenue growth is slowing, and competition is increasing. 

The third reason is valuation. Given the low growth of Apple, a PE Ratio of around 38 is high.  

It could also be a case of once bitten, twice shy. Buffett says he still regrets not selling Coca-Cola in 1998 when it was trading for a massive 50 times earnings. This high share price soon fell and wasn't reached again until 2014. 

2. The US market is no longer cheap 

There is little doubt that US stock market valuations are stretched, after two extraordinary years that have seen the S&P 500 index rise by 24% in 2023 and 23% in 2024. 

However, just because the market is high, doesn't mean that it can't go higher. Buffett once said, "I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower in a month or a year from now." 

Historically though, Buffett does have some form in not buying stocks due to excessive valuations in the market. In 1969, Buffett famously closed the Buffett Partnership because he could no longer find value in the market. He also didn't buy technology stocks in 1999, before the Tech Bubble burst. 

However, as Berkshire's recent 13F filing shows, Buffett is still buying stocks where he sees value, which aligns with his long-term philosophy of buying quality at a fair price. 

3. Buffett is preparing for a monster acquisition 

Buffett has been building his cash pile for a long time now and often speaks of buying a "big elephant" investment. One example of this was his investment in Apple. But there surely are more 'big elephants' to come. 

While he waits, he continues to build the greatest cash war chest in corporate history, so if markets do fall, Buffett will be ready. 

4. Buffett is getting Berkshire ready for the next stage 

At 94, Buffett knows that he'll soon be handing over the reins of Berkshire to his successors. 

He has always cared deeply about what will happen to Berkshire after he is gone and has been preparing for that scenario for decades.  

Given Buffett's incredible abilities, it is highly likely that he has set up the exact team needed to continue Berkshire running with the same culture and in the same way. A massive cash pile will certainly give his investment team many options for the future. 

Which possibility is more likely? 

We don't know the exact reason for Buffett building his massive cash pile - it may even be a combination of all four possibilities - but I believe that the concentration risk associated with owning so much Apple, combined with Apple's excellent selling price, was the primary driver behind the sales and the resulting cash build-up. 

5 key investment lessons 

There are five important lessons we can take away from Buffett's recent selling activity. 

1. Keep an eye out for concentration risk in your portfolio. Don't overexpose yourself to any one stock, sector, or asset class. 
2. Diversification across equities, bonds and cash is always a good idea. Rebalance your portfolio if it becomes too highly weighted towards one stock or asset class. 
3. Be willing to change your mind on a stock if the stock's dynamics change. 
4. No stock is worth an infinite price. If a stock becomes too expensive, it can pay to sell some down. 
5. There's always value in holding some cash in your portfolio, as it provides portfolio stability and allows you to take advantage of investment opportunities as they arise. 

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