Student Question: Buffett Holds More Cash Than in 2018 Q4 and Says There May Be a 50% Correction
The answer explains Buffett’s cash position as a percentage of assets and warns investors to verify information themselves.
Student question: [In Buffett's latest shareholder letter, he holds more cash than in 2018 Q4 and says there may be a correction, even around 50%.] CLEC Investment and Financial Education Channel. Post date: March 12, 2020
Answer:
This question may also be on many people's minds.
Although the total amount of cash Buffett holds may be higher than in the past, his total assets are also much larger, and cash is only 5% of his position. The calculation is at the end.
Investors should not treat every outside message as true. All information must be verified, calculated, and thought through by yourself before you believe it. Do not simply repeat what others say.
Buffett now holds only 5% cash, lower than what we recommend. Of course, Buffett does not need to live on that cash. We recommend that retired investors hold only two to three years of cash, or 20% to 30% in cash.
So if you follow our suggestion, your cash position should be much higher than Buffett's.
Buffett does not predict the market. Buffett has said the market can fall 50% at any time. He says this every year.
We have also said that at any time, the market can fall 30% or more for no reason. Individual stocks can fall 50% for no reason, and that is not strange at all. But this does not affect our long-term investment positions. Buffett will not reduce his stock holdings just because the market may fall at any time.
Buffett has been increasing his stock holdings throughout his life. Although his cash has increased, his stock assets are even larger. Why focus only on how much cash he has, instead of noticing that his stock assets are larger?
BRK-A
Cash holdings: $128B
Total debt: $108B
Net cash: $28B
Total market value: $560B
Net cash ratio: $28B / $560B = 5%
This is like having a net asset market value of $560,000,000,000, loans of $108,000,000,000, and still keeping $128,000,000,000 in cash, then concluding that the cash position is too high.
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