The Chart That Explains His Strategy

Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) has amassed the largest pile of cash ever held by a public company. At $344 billion, Berkshire Hathaway’s war chest is more than the combined cash reserves of Apple Inc. (AAPL), Microsoft Corp. (MSFT), Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), and NVIDIA Corp (NVDA)—despite them being collectively 14 times Berkshire’s market value. Also striking is that the record-breaking stockpile has doubled in just over a year.

So what gives? As in everyday life, companies save for three main reasons: to prepare to weather an economic storm, to make a major purchase, or because they think what’s available isn’t worth it—in market parlance, it’s overvalued. 

A key chart value investors like Buffett use could help us narrow down the options: the S&P 500 index’s historic price-to-earnings ratio. That’s because it now sits 67% above its historical norm and almost 50% above its early 2022 value. This remarkable deviation could be a major reason that the famed Oracle of Omaha could be storing cash.

What This Chart Tells Us

The chart for the S&P 500’s price-to-earnings (P/E) ratio since 2022 tells a striking story about the stock market. It tells us investors are paying $30 for each dollar of earnings for the trailing 12 months, far above the historical median of 17.9.

In other words, investors are paying almost $30 for each dollar of corporate earnings when, historically, they’ve paid 40% less. We’ve focused the chart on the run-up in the P/E ratio since early 2022; since then, it’s ballooned 50%.

Thus, this chart could provide a stark warning that stock prices are being driven more by investor optimism than the underlying value of these stocks, exactly the kind of market condition that Buffett has said makes him keep his “elephant gun” of cash at the ready.

Why Buffett’s Cash Pile Keeps Growing

Buffett famously preaches a straightforward investing philosophy: Be fearful when others are greedy. Given Buffett’s “pledge” to Berkshire shareholders to practice “extreme fiscal conservatism” and since market valuations have been well above historical norms, it’s no surprise, perhaps, that Berkshire sold over $100 billion in stocks during the first nine months of 2024, including cutting its massive stake in Apple by two-thirds.

Cash As Insurance

Buffett has said that having a sizable war chest is a cornerstone of Berkshire’s risk management. Berkshire’s cash reserves served the company well during the 2008 financial crisis, when Berkshire provided crucial funding to companies like the Goldman Sachs Group Inc. (GS) and Bank of America (BAC) on extremely favorable terms, generating billions in profits.

“During the 2008 panic, Berkshire generated cash from operations and didn’t need to borrow to keep going,” Buffett told Berkshire investors at the end of 2023. “We did not predict the time of an economic paralysis but we were always prepared for one.” Soon afterward, Berkshire would nearly double the size of its war chest.

The Bottom Line

Historical charts of the S&P 500 index P/E ratio suggest that when it’s high, it often precedes major market corrections—examples include 1987, 1992, 2002, and 2008. At the end of 2023, Buffett told shareholders that “Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced,” which should have reassured his company’s investors. But that he thought the reminder necessary in this market is deeply unsettling for anyone else.