Warren Buffett's Berkshire Hathaway War Chest Approaches $400 Billion. Is This a Red Flag for the Stock Market?

Berkshire Hathaway (BRKA 0.28%) (BRKB +0.03%), under the leadership of legendary retired CEO Warren Buffett, developed a reputation for having its money work for shareholders. Buffett was a master of value investing and tended to favor dividend stocks that offered regular payouts that Berkshire pocketed like clockwork. And it appears that Buffett’s successor, Greg Abel, is cut from the same cloth.

But something interesting is happening at Berkshire Hathaway these days. The conglomerate is amassing a massive pile of cash — nearly $400 billion at the end of the first quarter. The company is growing that cash hoard rather than putting it to work — taking a conservative, cautious approach even as the stock market continues to reach new highs.

Why is Berkshire amassing cash? And should investors mirror the company’s cautious approach?

Berkshire’s cash position

The issue here isn’t that Buffett, Abel, and the rest of the management team are souring on the market. Berkshire Hathaway doesn’t chase dividends just for the sake of the yield. What it really does is look for productive assets — and it’s willing to sit on the sidelines when the price isn’t right.

For instance, the Buffett indicator — measuring the ratio of market capitalization to GDP — is a favored metric for reading the overall value of the stock market. Buffett has said anything over 200% as overvalued and “playing with fire.” And at this writing, the Buffett indicator is at 225%.

That helps explain why Berkshire Hathaway has been amassing cash — it’s been a net seller of stocks for more than 12 quarters now, reducing major stakes in blue chips like Bank of America and Apple, and leading Berkshire to increase its cash position by 14% in the last year.

Source: Berkshire Hathaway

Buffett acknowledged that he was looking for a big deal to make in the last weeks of his tenure heading Berkshire Hathaway. But nothing made sense, he said, based on current market prices. Its biggest deal of the year was in October, when it bought Occidental Petroleum‘s chemical business, OxyChem, for $9.7 billion.

“It means that when I look at the stock market, when I look at companies of a size that would make any difference to our total, I don’t see anything. Well, we’re buying one or two things, but it’s peanuts. But I’m willing to spend $100 billion this afternoon, you know,” Buffett told CNBC recently.

Lessons from Buffett and Berkshire Hathaway

Does all this mean that investors should sit on the sidelines right now? Not necessarily.

Buffett’s unwillingness to purchase companies should be viewed with a corporate lens — he’s not soured on the market itself. Still, he sees the takeover of a full company as a bad investment while valuations are elevated. “I’d rather have $100 billion and a really good business at a sensible price than have $100 billion in cash,” Buffett said. “At certain levels, cash is necessary, but cash is not a good asset.”

Berkshire’s cash position today is greater than the market capitalizations of some of Buffett’s longtime investments, including Bank of America (market cap of $370 billion), Coca-Cola ($336 billion), or American Express ($217 billion). Rest assured, the conglomerate will be ready to make a move when the price is right.

Retail investors aren’t looking for the elephant-sized deals that Berkshire Hathaway craves. That’s why they should keep their investing journey going. That includes dollar-cost averaging and making regular contributions to their 401(k)s and other investment vehicles.