“Some financial advisors confirm that Buffett is finding it more difficult than ever to find undervalued companies to acquire.“
Warren Buffett may have a record amount of cash, but that doesn't necessarily mean the famous investor thinks the stock market is overvalued.
This is important to note in order to counter the narrative that has emerged since the release of the last quarterly report from Buffett's company, Berkshire Hathaway BRK.A,
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Some financial advisors assert that the group's huge cash hoard — more than $150 billion in cash and short-term investments, the largest ever in the company's nearly 60-year history — suggests that Buffett is finding it harder than ever to find undervalued companies. Of its real value. Acquire. If so, this in turn means that the stock market is seriously overvalued.
However, put into context, Berkshire's current cash level is unexceptional. As a percentage of the company's total assets, this level is roughly equal to its historical average. Think of it this way: As Berkshire has grown as a company, allocating a fixed percentage to cash translates into an increasing dollar amount held in cash and short-term investments. All Berkshire's expanding cash stock can tell us is that the company is bigger than it was before.
As you can see from the chart below, although Berkshire's cash allocation has not been constant, it has fluctuated in a narrow range. Berkshire's most recent allocation — 15.7% — is essentially no different from its average of 15.5% since 2011.
The chart also includes a chart of the S&P 500 SPX,
It shows that changes in Berkshire's cash level are not inversely related to the ups and downs of the market. Such an inverse correlation may exist if Buffett's cash allocation reflects a contrarian reaction to an overvalued or undervalued market. Instead, there was often a positive correlation between the two series. During the 2022 bear market, for example, the cash allocation declined — contrary to what you would expect on the theory that the allocation reflects an increasing number of trades on Wall Street.
This doesn't mean Buffett is a bad market timer. After all, he doesn't believe in timing the market in the first place. Fluctuations in Berkshire's cash level are largely due to factors other than market timing. For example, the decline in the company's cash allocation in 2022 largely reflects the acquisition of Allegheny Corp. for $11.6 billion in cash.
Bottom line? While Warren Buffett may believe the stock market is overvalued, you can't infer that from Berkshire's current allocation to cash and short-term investments.
The broader takeaway from this discussion is the value of adopting a skeptical stance toward Wall Street's assertions. Not all of them are misleading, but many of them are, even those that seem convincing on the surface.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to audit them. It can be reached at mark@hulbertatings.com
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