With uncertainty on the rise, a lot of investors are looking to billionaire investor Warren Buffett to get his insight into what’s coming for US stocks. While the ‘Oracle of Omaha’ hasn’t explicitly called for a market crash in 2025, his actions imply a storm might be just around the corner. And actions often speak louder than words.
A cash hoard
Looking at Buffett’s investment firm, Berkshire Hathaway (NYSE:BRK.B), he appears to be growing increasingly cautious. In fact, since the last nine quarters, Buffett and his team have been a net seller of stocks, resulting in a record cash pile of $344bn.
Some of the positions he’s been reducing include Ulta Beauty, Bank of America, Capital One Financial, Citigroup, Nu Holdings, Charter Communications, T-Mobile US and, most recently, DaVita.
At the same time, the famous Buffett Indicator, which compares the total market-cap of US stocks with US GDP, is now sitting at 187%. As a quick reminder, any value above 158% is a signal that stock prices are significantly overvalued.
Pairing the elevated indicator with Berkshire’s selling activity and the fact that the US could potentially fall into a recession later this year due to short-term tariff impacts certainly suggests that Buffett is preparing for the worst. And if the market does indeed go into a freefall, Berkshire’s enormous cash pile perfectly positions the investment firm to start snapping up terrific companies at discounted prices.
Another explanation?
Under Buffett’s leadership, Berkshire Hathaway’s investment portfolio has delivered an average annualised return of 19.9% since 1965. That’s essentially double what the S&P 500 achieved over the same period. So it’s understandably concerning to see such a great investor make bearish moves.
However, there may be another factor to consider here – age. Buffett is 94. Greg Abel has already been named as his successor to Berkshire Hathaway. And the decision to start building a cash war chest could also be a move to provide Abel with a strong jumping-off point when he takes over. While it may be a coincidence, the increased selling activity at Berkshire did start to ramp up following the passing of Buffett’s partner and friend, Charlie Munger.
What to do now?
Insulating a portfolio with a sizable cash position is a proven risk management strategy, especially during periods of economic uncertainty. While cash can be a drag on performance, it also provides investors more flexibility to capitalise on buying opportunities when markets wobble.
So following Buffett’s footsteps and building up some cash may be a prudent move right now, especially if investors’ fears surrounding tariffs turn out to be true. Of course, there’s another solution – simply buy shares in Berkshire Hathaway.
Such a move would still expose a portfolio to potential short-term panic from Berkshire shareholders who are not focused on the long run. However, it also allows investors to benefit directly from Buffett’s investment decisions. Of course, this comes paired with the risk that Buffett may not be around for much longer. With his departure, shareholders’ faith in Abel will undoubtedly be tested.
This post was originally published on Motley Fool
