Billionaire Warren Buffett Has a $348 Billion Dilemma -- and His Decision Is Only Getting Tougher

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8 hours ago

Warren Buffett has been a net seller of stocks for two and a half years.
Though Berkshire Hathaway's cash pile has ballooned to $348 billion, the historical priciness of equities is keeping Buffett firmly on the sidelines.
While Buffett's patience may be unsettling to investors, his willingness to wait for price dislocations is what's made Berkshire's chief such a phenomenal asset manager.
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There isn't a money manager on Wall Street who garners more attention from professional and everyday investors than Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) billionaire CEO Warren Buffett. When you deliver an aggregate return for your company's Class A shares (BRK.A) of better than 5,910,000% over six decades (as of the closing bell on June 11), you're going to draw a crowd.
But the aptly dubbed "Oracle of Omaha" is also 94 years old and readying to hang up his proverbial work coat. During Berkshire's annual shareholder meeting in early May, Buffett announced his plan to step down as the company's CEO by the end of the year and hand over the reins to predetermined successor Greg Abel.
Though Warren Buffett's time at the helm is limited, it doesn't change the fact that he's facing a $348 billion dilemma, which is seemingly getting tougher by the day.
Most investors follow Buffett to get a bead on which stocks he's been buying and selling -- with far more interest in the former than the latter. Riding his coattails has been a profitable investing strategy for decades.
While Buffett has, indeed, been purchasing shares of select companies on a quarterly basis, the theme of the last two and a half years is that of Berkshire's chief being a net seller of equities.
Berkshire Hathaway's quarterly operating results contain a detailed consolidated cash flow statement that specifically lists "purchases of equity securities" and "sales of equity securities." Some simple arithmetic can allow anyone to decipher whether or not the Oracle of Omaha and his top investment advisors were net buyers or sellers of stocks in the latest quarter.
During the March-ended quarter, Warren Buffett sold $1.494 billion more in stocks than was purchased. This marked the 10th consecutive quarter -- a stretch spanning from Oct. 1, 2022 to March 31, 2025 -- where Buffett was a net seller of stocks. On a cumulative basis, Berkshire's head honcho has disposed of $174.4 billion more in stocks than was purchased over this 30-month timeline.
All the while, the roughly five dozen businesses Berkshire owns have remained sustainably profitable and continue to generate positive cash from operations. Put this net cash generation together with Buffett's persistent net-selling activity and you get Berkshire Hathaway's cash pile (which includes U.S. Treasuries) ballooning to $347.7 billion.
For most companies, an exorbitant cash pile would be a luxury. But for Berkshire Hathaway's lead investor, it's indicative of a dilemma that shows no signs of resolution anytime soon.
In an ideal world, the Oracle of Omaha would prefer to put most of his company's capital to work via large investments or acquisitions that would move the needle. Keep in mind that at least $30 billion in combined cash, cash equivalents, and U.S. Treasuries needs to remain on Berkshire's balance sheet to conduct share buybacks, so Buffett won't be dipping below (or generally close to) this level.
However, Berkshire's top investor is also unwavering in his desire to get a good deal. Regardless of a company's competitive advantages or rich history, Warren Buffett won't chase pricey stocks higher. He'll patiently sit on his hands and wait for price dislocations to crop up before diving in.
Despite Berkshire's cash pile growing to a record $348 billion, Buffett has little-to-no incentive to put this capital to work amid the historic priciness of the stock market.
Nearly a quarter of a century ago, in an interview with Fortune magazine, Buffett referred to the market cap-to-GDP ratio as "probably the best single measure of where valuations stand at any given moment." This valuation tool, which aggregates the value of all publicly traded stocks and divides it by U.S. gross domestic product (GDP), has come to be known as the "Buffett Indicator."
When back-tested to 1970, the Buffett Indicator has averaged a reading of approximately 85%, which means the total value of all publicly traded stocks has equated to 85% of U.S. GDP. However, as of the closing bell on June 10, the Buffett Indicator was a few hundredths shy of 202%! It's also within a stone's throw of its all-time high of 205.55%, which was set in mid-February.
Another broad-stroke valuation tool that demonstrates what little value can be found on Wall Street at the moment is the S&P 500's (SNPINDEX: ^GSPC) Shiller price-to-earnings (P/E) Ratio, which may also be referred to as the cyclically adjusted P/E Ratio (CAPE Ratio). The Shiller P/E is based on average inflation-adjusted earnings over the prior 10 years.
When back-tested to January 1871, the average Shiller P/E multiple is a touch over 17. As of the closing bell on June 11, the Shiller P/E sported a multiple of more than 37. Although this is down from a peak reading of 38.89 during the current bull market cycle, it marks the third-priciest multiple spanning 154 years.
While the Shiller P/E offers no guidance on when stock market corrections will commence, it does have a flawless track record of foreshadowing eventual downside of 20% or more in Wall Street's major stock indexes, including the S&P 500, when surpassing a multiple of 30.
Historically, putting Berkshire Hathaway's capital to work has helped the company grow its sales and/or profits. But until valuation multiples stop going up, it's unlikely that Warren Buffett will be doing much of anything on the investment front, which suggests Berkshire's cash pile is going to continue to expand.
However, this isn't necessarily a bad thing -- even if investors are growing weary of the Oracle of Omaha's net-selling activity.
To use a baseball analogy, Buffett's outsized investment returns aren't a function of swinging at a lot of pitches. Even though Berkshire Hathaway has more than enough capital that Buffett could, in theory, swing for the fences on a daily basis, his success has been based on waiting for the right pitch to enter his wheelhouse.
Regardless of how long it takes, Buffett and his successor Greg Abel have demonstrated a willingness to remain on the sidelines until valuations make sense.
For example, Buffett has been purchasing shares of satellite-radio operator Sirius XM Holdings (NASDAQ: SIRI), whose forward P/E ratio of a little over 7 is just shy of its all-time low as a publicly traded company of 31 years. Though Buffett's investment in Sirius XM isn't needle-moving, it's representative of the principles to which Buffett has aligned his investment philosophy. Sirius XM's legal monopoly status ensures its moat, and the company's ultra-low forward P/E presents as a price dislocation amid a historically expensive market.
As I've pointed out before, patience paid off handsomely in August 2011 for Berkshire Hathaway and its shareholders when Buffett orchestrated a deal to infuse Bank of America (NYSE: BAC) with $5 billion to shore up its balance sheet. In return, Buffett's company netted $5 billion in BofA preferred stock yielding 6% annually, as well as warrants to purchase up to 700 million shares of Bank of America common stock at $7.14 per share. These warrants were executed in the summer of 2017, leading to an instant (unrealized) profit of $12 billion for Berkshire.
Eventually, the lion's share of Berkshire Hathaway's $348 billion in cash will be put to work -- but this won't happen until price dislocations or unique, needle-moving situations present themselves.
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America and Sirius XM. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Billionaire Warren Buffett Has a $348 Billion Dilemma -- and His Decision Is Only Getting Tougher was originally published by The Motley Fool