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In 2024, the momentum in the U.S. stock market appeared relentless. After a remarkable surge of approximately 26% in the S&P 500 in 2023, the index climbed another 36% in 2024, despite some temporary setbacks earlier in the year.
Amid this bullish backdrop, Jim Grant, editor of Grant’s Interest Rate Observer, issued a pointed caution for investors, suggesting that they consider the potential risks of an overheated market.
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“We shouldn’t forget that it is at an all time [high], almost everything, price [to] earnings, price [to] book, price [to] sales, what have you, and nor should we forget that the greatest equity investor is about ready to show a balance sheet that’s 50-50, with more T-bills than stocks,” he said in an interview with Fox Business.
Grant was alluding to legendary investor Warren Buffett, implying that Buffett’s pivot toward safer assets like Treasury bills — short-term debt securities issued by the U.S. Treasury that mature in one year or less — may be a red flag for investors.
Buffett’s cash reserve
Buffett’s company Berkshire Hathaway reduced its stakes in several major holdings in 2024. As a result, the company is sitting on a substantial cash reserve. As of June 30, 2024, Berkshire’s cash, cash equivalents and short-term investments in U.S. Treasury bills totaled $276.9 billion.
Particularly noteworthy is the vast sum Berkshire has allocated to Treasury bills. By August, Berkshire held a whopping $234.6 billion in Treasury bills— more than the U.S. Federal Reserve’s own Treasury bill holdings.
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Why is Buffett holding so much cash?
Berkshire’s massive cash position has sparked questions about why Buffett isn’t seizing more investment opportunities. After all, as Grant noted, Buffett is often hailed as the world’s greatest investor. From 1964 to 2023, Berkshire achieved an extraordinary overall gain of 4,384,748%, far outpacing the S&P 500’s return of 31,223% over the same period.
While some see Berkshire’s cash hoard as a defensive stance against a potential market downturn, others interpret it differently. Fund manager Chris Bloomstran told Business Insider that Berkshire’s large insurance operations necessitate a substantial cash reserve to cover potential payouts.
Moreover, given Berkshire’s size, its range of suitable investments is limited. Bloomstran pointed out that with Treasury bills offering decent yields, Buffett can afford to be patient.
“He’s limited to maybe the 100 biggest companies in the S&P 500 and maybe a handful of international businesses to be able to invest in,” Bloomstran explained. “So, his opportunity set is expensive, but he doesn’t mind earning 5.3% in the interim, but it does not mean in any way, shape, or form that a stock market crash is imminent.”
Of course, financial prudence has always been a cornerstone of Buffett’s philosophy.
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Buffett’s conservative approach could prove to be a significant advantage during times of financial turmoil. Buffett highlighted that during the 2008 financial crisis, Berkshire generated cash through its operations, without relying on commercial paper, bank lines, or debt markets in any capacity.
“We did not predict the time of an economic paralysis, but we were always prepared for one,” Buffett said, underscoring the importance of maintaining liquidity in uncertain times.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.