Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) has amassed the biggest pile of money ever held by a public firm. At $325 billion, Berkshire Hathaway’s struggle chest is greater than the mixed money reserves of Apple Inc. (AAPL), Microsoft Corp. (MSFT), Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), and NVIDIA Corp (NVDA)—regardless of them being collectively 14 occasions Berkshire’s market worth. Additionally placing: the record-breaking stockpile has doubled in simply over a 12 months.

So what provides? As in on a regular basis life, firms save for 3 principal causes: to organize to climate an financial storm, to make a significant buy, or as a result of they assume what’s obtainable is not value it—in market parlance, it is overvalued. 

A key chart value investors like Buffett use might assist us slim down the choices: the S&P 500 index’s historic price-to-earnings ratio. That is as a result of it now sits 67% above its historic norm and nearly 50% above its early 2022 worth. This exceptional deviation may very well be a significant purpose that the famed Oracle of Omaha may very well be storing money.

What This Chart Tells Us

The chart for the S&P 500’s price-to-earnings (P/E) ratio since 2022 tells a placing story in regards to the inventory market. It tells us buyers are paying $30 for every greenback of earnings for the trailing 12 months, far above the historic median of 17.9.

In different phrases, buyers are paying nearly $30 for every greenback of company earnings when, traditionally, they’ve paid 40% much less. We have centered the chart on the run-up within the P/E ratio since early 2022; since then, it is ballooned 50%.

Thus, this chart might present a stark warning that inventory costs are being pushed extra by investor optimism than the underlying worth of those shares, precisely the type of market situation that Buffett has mentioned makes him maintain his «elephant gun» of money on the prepared.

Why Buffett’s Money Pile Retains Rising

Buffett famously preaches a simple investing philosophy: Be fearful when others are grasping. Given Buffett’s «pledge» to Berkshire shareholders to apply «excessive fiscal conservatism» and since market valuations have been properly above historic norms, it is no shock, maybe, that Berkshire offered over $100 billion in shares in the course of the first 9 months of 2024, together with slicing its large stake in Apple by two-thirds.

Money as Insurance coverage

Buffett has mentioned that having a large struggle chest is a cornerstone of Berkshire’s risk management. Berkshire’s money reserves served the corporate properly in the course of the 2008 monetary disaster, when Berkshire supplied essential funding to firms just like the Goldman Sachs Group Inc. (GS) and Financial institution of America (BAC) on extraordinarily favorable phrases, producing billions in earnings.

«In the course of the 2008 panic, Berkshire generated money from operations» and did not must borrow to maintain going,» Buffett instructed Berkshire buyers on the finish of 2023. «We didn’t predict the time of an financial paralysis however we had been at all times ready for one.» Quickly afterward, Berkshire would practically double the scale of its struggle chest.

The Backside Line

Historic charts of the S&P 500 index P/E ratio recommend that when it is excessive, it usually precedes main market corrections—examples embrace 1987, 1992, 2002, and 2008. On the finish of 2023, Buffett instructed shareholders that «Berkshire can deal with monetary disasters of a magnitude past any heretofore skilled,» which ought to have reassured his firm’s buyers. However that he thought the reminder vital on this market is deeply unsettling for anybody else.