Investors misunderstood! Buffett's huge cash reserves may not be a bearish signal

Berkshire Hathaway announced its second-quarter performance, however, a group of bearish investors are nervous about Buffett's record $276.9 billion cash reserve.

According to these people, this means that the stock market may soon experience a significant decline, as Buffett believes that the market has no investment value at the current high valuation.

In fact, according to Chris Bloomstran, the fund manager of Semper Augustus, managing about $550 million in assets with Berkshire Hathaway as its largest position, the situation is not as described.

Bloomstran explained earlier in an interview that Berkshire Hathaway's huge cash reserve has more "details" and does not reflect Buffett's bearish view on the stock market or the imminent collapse of the stock market.

"Everyone is very excited, they are making a big deal out of it, but it's not that serious," Bloomstran said.

Considering Berkshire's Cash Reserve

Bloomstran believes that investors are better off measuring the company's cash reserve by the percentage of cash reserves to Berkshire's total assets, rather than measuring Berkshire's cash position on an absolute basis.

If measured by total assets, Berkshire Hathaway's cash position at the end of the first quarter was 17.5%, which is basically in line with the long-term average level. Since 1997, Berkshire Hathaway has consistently kept cash on its balance sheet, averaging 13% of assets.

Another way to observe Berkshire Hathaway's cash position is to compare it with the company's market value, which paints a similar picture: Berkshire Hathaway's $189 billion cash position at the end of the first quarter is actually at a fairly normal level, far below its peak in 2004, which was around 40%.

Berkshire Hathaway's cash reserve is actually at a fairly normal level

Berkshire Hathaway Needs to Hold Cash

Just because Berkshire Hathaway holds over $200 billion in cash does not mean that they can invest all of this cash if they find a large enough target.

"I think about half of the cash is a reasonable deployment," Bloomstran said.

This is because Berkshire Hathaway's massive insurance business requires the company to have sufficient cash reserves to provide funds for potential insurance claims.

While Buffett has stated that Berkshire Hathaway will maintain around $30 billion in permanent cash reserves to provide funds for potential insurance claims, Bloomstran takes a more conservative approach by adding about $50 billion to this reserve level to cover a full year of potential insurance losses "Therefore, we believe that $82 billion more or less is Berkshire Hathaway's permanent cash reserve," Bloomstran said in his annual investor letter last month, which means Berkshire Hathaway can have $110 billion left for investments.

Limited Investment Scope of Berkshire Hathaway

Due to its massive scale, Berkshire Hathaway can only invest in a few companies that will truly drive the conglomerate's development.

Considering that the yield on short-term U.S. Treasury bills and other cash equivalents exceeds 5%, Buffett and his company are spending time looking for suitable investments at the right prices, which could materialize at any time, just like Berkshire's initial investment in Apple in the first quarter of 2016.

At that time, the S&P 500 index was also at a historical high, Apple was even the world's largest company, and Berkshire Hathaway's cash reserves were also at a historical peak. None of these factors (which exist today) prevented Buffett from making one of Berkshire Hathaway's best investments in history. Bloomstran said, "He may be limited to investing in the largest 100 companies in the S&P 500 index and a few international companies, he doesn't mind getting a 5.3% return during the transition phase, but that doesn't mean the stock market is about to collapse. He is just trying to find stable-priced and worthwhile companies to invest in, his investment scope is limited."

In conclusion, investors should not hold a bearish view on the stock market just because Berkshire Hathaway holds a record cash reserve. At this year's annual shareholder meeting, when asked "What is Buffett waiting for?" this legendary investor replied:

"We only swing at pitches in our sweet spot."