One Unusual Theory Why Buffett is Holding So Much Cash

A lot has been made of Berkshire Hathaway’s massive cash pile that now amounts to $334 billion, an all-time record high. The figure is so exorbitant relative to the market capitalization of Berkshire Hathaway - just north of $1 trillion at the time of writing - that speculation is reaching fever pitch levels as to what Buffett is really thinking.

The Wall Street Journal declared “Warren Buffett Defends His Growing Cash Pile” while CNBC ran with the headline “Warren Buffett Amasses More Cash and Sells More Stock But Doesn’t Explain Why in Annual Letter.”

In the past, it didn’t take Detective Columbo to uncover the reason for previous high cash levels as a percent of total market capitalization. For example, Buffett had been highly conservative heading into 2008 but in October of that year he used his deep pockets to snap up stakes in a host of brand name companies, such as his $5 billion bet on Goldman Sachs.

This time around things seem different, and financial sleuths appear stumped. Is Buffett betting on a massive crisis and following his own advice to be fearful while others are greedy? Or is he planning to go “elephant hunting” as he likes to describe the pursuit of massive conglomerates that are in his crosshairs?

Well, one theory that has not yet surfaced may be closer to reality but it’s not yet on anyone’s radar from what we can tell.

Is Buffett In Cash For This Peculiar Reason?

The more analysts and historians study Buffett, the more unusual and creative his thinking appears at crucial times in Berkshire’s history.

When he first bought Berkshire Hathaway it was a textile mill, and as recently as his last shareholder letter Buffett stated that this purchase was a mistake. Yet, in retrospect, Buffett applied enormous creativity to pivot a failing business into an insurance giant with railroad holdings and a plethora of other businesses and equity holdings. Who else would even dare to consider such a creative evolution from a failing textile mill?

Or what about the first purchase of Apple that subsequently led to over $100 billion in unrealized gains for Berkshire Hathaway. At the time, Buffett had been famous for shunning technology as a sector that didn’t fall within his sphere of competence. But Buffett viewed Apple in a different light - as a consumer play with enormous pricing power because of a highly loyal customer base.

Now if we connect the breadcrumbs of creativity across Buffett’s entire history leading Berkshire (only two of which we have mentioned but the list is long and worthy of deeper study for those who want to learn more about the Oracle of Omaha’s formula for success), a new theory might well explain Buffett’s decision to build such the current, enormous cash pile.

At 94, Buffett stated in his more recent annual shareholder report that Greg Abel will be taking over sooner than later. So we theorize whether Buffett is building an enormous cash pile not because he’s necessarily so bearish on the market or can’t find opportunities, or even has his sights set on some ‘elephantine’ opportunity but rather is building a massive pile of dry powder for his investment lieutenants to deploy when he steps down?

Is it possible that Buffett has made a backroom deal with them? Don’t touch Apple, or Coca Cola or American Express, or any of his favorite long-term holdings BUT instead, at their discretion, allocate the $334 billion cash pile as they see fit, minus the cash reserves needed for the insurance unit?

By so doing, Buffett would be exemplifying his creative approach to running the business, even after he’s stepped down, ensuring that the wide moat companies that Berkshire had held for so long will continue to generate high returns on capital without triggering tax events, and so will not derail Berkshire Hathaway’s current cash flow trajectory but will give his lieutenants enough fire power to influence whether that trajectory is amplified or muted by their own decision-making?

It’s just a theory. But it fits squarely into Buffett’s imaginative approach to business and may well be the most accurate explanation yet. Time will tell.