Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) investment vehicle has always held a large cash balance on its books. And even after the billionaire investor’s latest $51bn shopping spree earlier this year, the firm’s cash balance is still above $100bn!
This degree of financial liquidity is one of the main reasons some shareholders are pushing for a dividend. But with fears of stagflation on the rise, is he actually planning ahead for a potential stock market crash?
Warren Buffett’s treasure hoard
At the end of 2021, Berkshire Hathaway held just over $146bn in cash & equivalent assets and short-term treasury bills. Following the start of the stock market correction in 2022, Buffett and his team spent over $51bn buying stocks.
The list of companies included Chevron, Occidental Petroleum, HP Inc, Apple, and Activision Blizzard. The decision to invest in Activision raised a few eyebrows since it appears to be an arbitrage investment, betting on Microsoft’s successful acquisition of the company. That’s quite an unusual move that has yet to pay off.
Overall, it was one of his most active buying quarters since the 2008 financial crisis. Skip ahead to the second quarter, and the spending pattern changes a bit. Berkshire remained a net buyer of stocks, spending a net $3.8bn on acquiring more shares in Apple, Chevron, Occidental Petroleum, and a handful of others. But that’s significantly less than a quarter ago.
Looking at the second quarter earnings, the impact of the 2022 stock market correction can be clearly felt, with the group posting a $53bn loss on its investments. It’s possible that as the economic situation worsened, Buffett and his team began tightening their belts. And then plan on buying more shares once the stock market tumbles further, or potentially even crashes.
It’s worth reiterating that even after all the investments made so far this year, the group still has around $105bn in cash at its disposal.
Planning for the next stock market crash
Looking at the latest activity from Berkshire Hathaway, it’s clear that Buffett continues to deploy his famous strategy of “be greedy when others are fearful, and fearful when others are greedy”.
The firm may be taking big hits to its equity portfolio today, but in the long-term, the group has a tendency to realise enormous gains from buying when prices are in free-fall.
Some investors like to buy shares in Berkshire, or copy its portfolio to tap into the proceeds of Buffett’s investing tactics. However, personally, I prefer to apply his principles to search for explosive long-term winners. Even here in the UK there are undoubtedly countless high-quality businesses with wide competitive moats currently trading at a discount.
Being able to identify these stocks is easier said than done. But by having some cash in reserve, as Buffett does, investors can capitalise on stock market downturns. And by buying top-tier businesses while they’re cheap, they can enjoy impressive returns once the stock market rally inevitably begins. At least, that’s what I think.