Why is Buffett Dumping $140b in Stocks When Inflation Could Crush Cash?

In 2024, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) investment holding company sold $143 billion worth of the stocks it owned, made only $9.3 billion in stock purchases, and halted repurchases of Berkshire Hathaway common stock. As the year wore on, Berkshire’s total cash reserves ballooned to $334 billion.

Why might that be?

After all, at last report, inflation in the United States is running at 2.8%. Assuming this inflation rate holds, it means the real value of Berkshire’s cash holdings is shrinking at the astonishing rate of nearly $9.4 billion per year.

That seems a drastic penalty for holding cash, and the fact that Buffett is adding to his cash holdings therefore implies either:

• Buffett believes inflation is going to slow down, and start improving.
• Or else he believes the risk of holding stocks is so high that he’s willing to accept a 2.8% (annual) loss to the value of his cash, rather than risk buying more stocks.

Is inflation slowing?

Let’s examine the first theory first. President Trump is waving his magic wand all around the world right now, shouting “abracadabra” and summoning new tariff protections hither and yon. Each time he does this, it raises the cost of goods.

(A reminder: A tariff is a tax that an importer must pay on goods it imports. If a car cost $10,000 before a tariff, and then you slap a 25% tariff on its import, the car now costs $12,500. The importer pays that $12,500, the foreign manufacturer is paid $10,000, and the $2,500 difference goes to the U.S. Treasury).

This is inflationary. At the same time, however, rising prices frighten consumers, so they are less inclined to buy things. Less buying lowers demand, slows the economy, and therefore is deflationary. Additionally, investors panicking over the effect of tariffs and selling their stocks is also deflationary, as it reduces the wealth of consumers so they have less money to spend.

In short, Mr. Buffett might be looking at the economic situation today, and concluding that inflation will cool off, lessening the cost of holding a lot of cash.

Are stocks overvalued?

That being said, two things can be true at the same time. Inflation may decline, and also stocks may be overvalued. Or at least some stocks may be overvalued.

Analysts report Berkshire Hathaway’s sales in 2024 seemed to focus on large-cap companies valued in excess of $10 billion, with banks Citigroup, Capital One, and Bank of America in particular all being pared from the portfolio, and Berkshire dramatically reducing his ownership stake in Apple, selling more than 500 million shares in the year. This suggests that the Berkshire Chairman is particularly worried about overvaluation in the large-cap space.

Indeed, with the Vanguard S&P 500 ETF (NYSEARCA: VOO) currently valued at nearly 22 times forward earnings, an historically high multiple, Buffett may be right to worry. In contrast, the S&P 400 mid-cap index and the S&P 600 small-cap index both trade below 16 times forward earnings, and are therefore arguably about 30% cheaper than larger stocks, which suggests the better move for investors right now, if they’re buying any stocks at all, would be to buy smaller, cheaper companies.

This poses a problem for Mr. Buffett at Berkshire, however. Valued at $1.1 trillion, you see, and with $334 billion in annual sales, Berkshire itself is a very large cap company. It takes a lot of money to move the needle on a company this big, basically requiring Berkshire to buy entire companies — entire very large companies — if it wants to grow its sales and profits measurably through acquisitions.

Now, this is not necessarily an insurmountable obstacle. At last report, only 28 companies listed on U.S. stock exchanges had a market capitalization greater than the $334 billion Berkshire has in the bank. Berkshire Hathaway actually has enough cash piled up to buy any one (or more than one) of the remaining 10,481 companies on Earth that cost less than that.

And yet, it’s these same very large companies that Berkshire is finding overvalued, and that it therefore probably does not want to buy! Hence Buffett’s observation, as expressed in his 2023 shareholder’s letter:

There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Yet they have to be attractively priced.

And that’s the risk for Berkshire Hathaway. It must buy large companies if it wants to move the needle. But if it does buy a big company, it’s at risk of overpaying, which would hurt the company’s profits.

So what’s the solution? For Berkshire Hathaway, it appears to be to hold cash and hope the inflation rate doesn’t devalue that cash more than buying the wrong company would devalue it. For you and me, the solution is simpler:

Avoid buying overpriced large cap stocks, and seek better bargains among cheaper small cap and mid cap stocks.

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