Warren Buffett’s Berkshire Hathaway is sitting on a massive $280 billion in cash. This has led to speculation about why the company has fattened its cash holdings. Some argue that Buffett believes a market crash is looming.
Others assert it’s a reasonable figure until the right buying opportunities arise. The recent interest-rate hiking cycle has made cash more attractive. You can still find accounts offering around 5% interest.
However, most top-paying savings accounts have seen sharp falls since interest rates were cut. While many savings accounts exceed inflation, this won’t last forever. The International Monetary Fund recommended that UK interest rates fall to 3.5% by 2025.
This will squeeze the amount you can earn on your savings. If you have time, history shows that other classes, such as shares, offer a much better chance of outstripping price rises. Research found the likelihood of stock market investments beating inflation is 87% over ten years and 100% over twenty years.
In contrast, these odds fall to 55% over ten years and 66% over twenty when it comes to cash. There are situations where holding cash is important. These include having a safety net equal to three to six months’ expenditure, covering emergencies, and having funds ready to seize stock-buying opportunities.
According to reports, Buffett invests a chunk of his cash in Treasury bonds with three-month or less maturity periods. This cash is ready to deploy into the market once the right opportunity comes along. But stocks and shares should prove a better option for any excess savings you don’t need to touch for at least five years.
buffett’s conservative cash strategy questioned
There’s nothing wrong with stashing a bit of extra cash right now. Just make sure you have a plan for it.
Buffett inevitably does. Ace investor, Samir Arora of Helios Capital, discussed the challenges and opportunity costs associated with holding cash during a market upswing. Arora highlighted that substantial losses can result from inaction in rapidly advancing markets.
Arora said Buffett’s decision to hold on to so much cash instead of reinvesting it during the current market rally could have led to a significant loss in potential returns. According to Arora, Buffett may have missed as much as $60 billion by keeping the funds on the sidelines. The US stock market has risen sharply over the last two years, with an estimated gain of around 50% from September 2022 to September 2024.
In contrast, Buffett’s cash, invested in lower-risk assets like treasuries, earns around 5% yearly. Arora suggests that the Oracle of Omaha has effectively lost out on around 40% of potential returns on the $150 billion he was holding in cash over that time. According to Arora, this adds up to a missed opportunity of $60 billion.
Buffett’s conservative approach to investing is well-known. He prefers to wait for the right opportunity, often making large purchases during market downturns when prices are low. However, Arora believes this strategy has its drawbacks, particularly in a rising market.
For Buffett to recover the lost opportunity from holding cash, the stock market would need to fall by at least 20%. Only with such a decline would Buffett’s decision to keep a large cash reserve be seen as a smart move. Arora raised the question of whether waiting for such a fall is worth it, especially given the ongoing rally in the US market.
In his view, holding so much cash during a period of growth may cost Buffett and Berkshire Hathaway more than they stand to gain from future market dips.
