Berkshire Hathaway’s cash reserves have reached a historic peak, a notable development given the recent optimism among investors.
The S&P 500 and Nasdaq Composite experienced double-digit growth in both 2023 and 2024. However, their performance has been lackluster at the beginning of the current year. As of the current date, the S&P 500 has decreased by 3%, while the Nasdaq, which is heavily focused on technology, has seen a more significant decline of 7%.
A mix of new tariff policies, the Federal Reserve’s ambiguous statements, and varied economic indicators have resulted in considerable uncertainty for investors. During such uncertain times, observing the actions of Wall Street’s top minds can be a valuable strategy.
One prominent investor to watch is Berkshire Hathaway’s CEO, Warren Buffett. Over the decades, Buffett’s consistent ability to outperform the market has made him a respected figure in the investment world.
Berkshire’s financial report at the end of 2024 reveals an intriguing detail: a cash and short-term investments balance of $334.2 billion as of December 31, the highest in the company’s history. This raises questions about whether Buffett and his team are preparing for a possible recession.
Examining Berkshire’s historical actions during previous economic downturns provides insight into their current strategy. An analysis of the company’s cash trends over the past 25 years, marked against U.S. recessions, offers a clearer picture.
During major recessions in the U.S., such as the dot-com recession and the Great Recession between 2008 and 2009, as well as the short recession in early 2020 due to the COVID-19 pandemic, Berkshire’s strategies can be observed. Prior to the dot-com crash, Berkshire’s cash position increased, but it began to decline as the recession took hold in 2001, suggesting deployment of cash amid market sell-offs.
The 2001 shareholder letter indicates that Berkshire focused on acquisitions rather than stock picks, including Shaw Industries, Johns Manville, XTRA, and MiTek. Similarly, during the Great Recession, Berkshire’s cash balance diminished significantly as it made notable investments in companies like Goldman Sachs and General Electric, aligning with Buffett’s preference for financial services and strong American brands.
In 2023, Buffett described stock market activity as resembling “casino-like behavior,” possibly influencing Berkshire’s strategy to increase its cash reserves over recent years.
Buffett’s well-known investment philosophy is to “be greedy when others are fearful” and vice versa. This philosophy is evident as Berkshire capitalized on depressed valuations during previous market downturns. The recent surge in the stock market, largely driven by optimism in the technology sector due to artificial intelligence, has led to inflated stock prices, making it challenging to find reasonable valuations.
Consequently, Berkshire has refrained from significant new portfolio additions, opting instead to accumulate cash and invest in Treasury bills, indicating caution amid widespread investor confidence.
Buffett and Berkshire do not engage in momentum-based investing. The decision to increase the cash balance does not necessarily indicate recession concerns. Rather, it reflects a lack of attractive valuations and a choice to earn modest returns on Treasuries instead of participating in an overheated stock market.
Adam Spatacco, the author, holds no positions in the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Goldman Sachs Group. Further information can be found in The Motley Fool’s disclosure policy.
