Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) has amassed the biggest pile of money ever held by a public firm. At $325 billion, Berkshire Hathaway’s warfare chest is greater than the mixed money reserves of Apple Inc. (AAPL), Microsoft Corp. (MSFT), Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), and NVIDIA Corp (NVDA)—regardless of them being collectively 14 occasions Berkshire’s market worth. Additionally hanging: the record-breaking stockpile has doubled in simply over a yr.
So what provides? As in on a regular basis life, corporations save for 3 foremost causes: to organize to climate an financial storm, to make a significant buy, or as a result of they assume what’s accessible is not price it—in market parlance, it is overvalued.
A key chart worth traders like Buffett use might assist us slim down the choices: the S&P 500 index’s historic price-to-earnings ratio. That is as a result of it now sits 67% above its historic norm and nearly 50% above its early 2022 worth. This outstanding deviation might be a significant purpose that the famed Oracle of Omaha might be storing money.
Key Takeaways
- Berkshire Hathaway’s document $325 billion is greater than the mixed money held by the 5 largest public corporations by market cap.
- The S&P 500 index price-to-earnings (P/E) ratio measures the common worth of the index’s corporations by dividing their mixed market capitalization by their whole earnings over the earlier yr, indicating how a lot traders are keen to pay for every greenback of earnings.
- The market’s P/E ratio of simply over 30 is 67% above historic averages, suggesting shares are considerably overvalued.
What This Chart Tells Us
The chart for the S&P 500’s price-to-earnings (P/E) ratio since 2022 tells a hanging story in regards to the inventory market. It tells us traders are paying $30 for every greenback of earnings for the trailing 12 months, far above the historic median of 17.9.
In different phrases, traders are paying nearly $30 for every greenback of company earnings when, traditionally, they’ve paid 40% much less. We have targeted the chart on the run-up within the P/E ratio since early 2022; since then, it is ballooned 50%.
Thus, this chart might present a stark warning that inventory costs are being pushed extra by investor optimism than the underlying worth of those shares, precisely the form of market situation that Buffett has stated makes him maintain his “elephant gun” of money on the prepared.
Why Buffett’s Money Pile Retains Rising
Buffett famously preaches an easy investing philosophy: Be fearful when others are grasping. Given Buffett’s “pledge” to Berkshire shareholders to follow “excessive fiscal conservatism” and since market valuations have been properly above historic norms, it is no shock, maybe, that Berkshire bought over $100 billion in shares throughout the first 9 months of 2024, together with slicing its large stake in Apple by two-thirds.
Money as Insurance coverage
Buffett has stated that having a large warfare chest is a cornerstone of Berkshire’s danger administration. Berkshire’s money reserves served the corporate properly throughout the 2008 monetary disaster, when Berkshire offered essential funding to corporations just like the Goldman Sachs Group Inc. (GS) and Financial institution of America (BAC) on extraordinarily favorable phrases, producing billions in income.
“Through the 2008 panic, Berkshire generated money from operations” and did not must borrow to maintain going,” Buffett instructed Berkshire traders on the finish of 2023. “We didn’t predict the time of an financial paralysis however we have been at all times ready for one.” Quickly afterward, Berkshire would almost double the scale of its warfare chest.
The Backside Line
Historic charts of the S&P 500 index P/E ratio recommend that when it is excessive, it usually precedes main market corrections—examples embody 1987, 1992, 2002, and 2008. On the finish of 2023, Buffett instructed shareholders that “Berkshire can deal with monetary disasters of a magnitude past any heretofore skilled,” which ought to have reassured his firm’s traders. However that he thought the reminder crucial on this market is deeply unsettling for anybody else.