Although the Oracle of Omaha rejects the idea of timing the market, historical data suggests that high levels of cash in the company could be linked to lower returns in the market in the medium term.
How good a market timer is Warren Buffett? Many are wondering, given the enormous amount of cash and short-term investments that Berkshire Hathaway accumulated: US$325,000 million until the end of September, according to the most recent data available.
Many interpret this as a sign that Buffett A bear market is expected, which would offer opportunities to put that cash to work, buying shares of companies at lower prices than today.
However, it’s difficult to reconcile that interpretation with Buffett’s long-held belief that timing the market is both impossible and stupid. Berkshire’s chairman and CEO insists he has no idea where the economy and the stock market are headed, and that he has never made an investment decision based on market-timing judgment.
It’s still possible that Berkshire Hathaway’s cash levels have meaning in terms of timing the market, however, despite Buffett’s denials. In other words, it could be that higher cash levels are followed by below-average market returns, and vice versa. However, few, if any, have taken the trouble to analyze the historical data to know for sure. For this column, I set out to do so.
What does the available data say?
The accompanying charts show Berkshire’s cash and short-term investments over the past two decades, both as a percentage of the company’s total assets and as a percentage of its market value. Expressed relative to company size, Berkshire’s cash and short-term investments as of September were above average, but not at record levels.
As a percentage of market capitalization, in fact, the all-time high occurred in 2004, when the total exceeded 35%, in contrast to 32% at the end of the third quarter of this year. The US bull market continued almost three years after that 2004 cash high, but then the Global Financial Crisis hit. Whether that 2004 reading is a success or failure as a market timing indicator depends on the investment horizon.
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That 2004 all-time high is just one data point. To look for systematic relationships, I measured the correlation between Berkshire Hathaway’s year-end cash levels over the past two decades and the S&P 500’s subsequent total returns.
Over the one-year horizon, I found no statistically significant relationship. But over a five-year horizon, there was a statistically significant inverse correlation; In other words, higher levels of cash were more frequently followed by lower stock market returns, and vice versa.
Over long-term horizons, Berkshire Hathaway’s level of cash and short-term investments contains information valuable on stock market outlook. Therefore, its near-record level sends a sober message about the difficulties the market may face over the coming years.
Source: Ambito
I’m a recent graduate of the University of Missouri with a degree in journalism. I started working as a news reporter for 24 Hours World about two years ago, and I’ve been writing articles ever since. My main focus is automotive news, but I’ve also written about politics, lifestyle, and entertainment.
