Mr. Buffett sticks to "cash is king"! Is it an alarm for the US stock market?

In the previous quarter, Mr. Buffet... $Apple (AAPL.US)$... reduced the proportion of owned shares in many US stocks, including...reaching a total amount of $75 billion of selling stocks....

In addition, $Berkshire Hathaway-A (BRK.A.US)$According to their financial report... the company held $234.6 billion of US short-term government bonds... and had more than $42 billion of cash and cash equivalents...The current available funds is a record high of $276.9 billion.is turning out to be.

In contrast, the US Treasury bonds with a maturity of less than one year held by the FRB were $195.3 billion as of July 31. This means thatBerkshire significantly exceeds the FRB in its position in US short-term bonds.This implies that.

Amidst the decline in US stocks, the "god of investment" is sending a pessimistic signal.
Warren Buffett has stated that during an economic crisis, he will purchase short-term bonds through US Treasury auctions.in the report.

Normally, the return on short-term government bonds is not as high as that of risk investments such as stocks, but due to the Federal Reserve Board (FRB) maintaining interest rates in the range of 5.25% to 5.5%, the return on short-term government bonds is expected to increase. As of August 2, the yield on 3-month government bonds was 5.05%, the yield on 6-month government bonds was 4.68%, and the yield on 12-month government bonds was 4.18%.

If the government bond yield is around 5%, it is estimated that Berkshire Hathaway's risk-free return on the large amount of US bonds it holds would be approximately $12 billion annually, and about $3 billion in quarterly profit.

This series of cash carryovers and stock-selling actions undoubtedly indicated Mr. Buffett's pessimistic attitude towards the US economy and market, which is how the market interpreted it.In addition to the 'God of Investment' displaying actions conveying a pessimistic attitude towards the US economy, more and more people on Wall Street are starting to worry about the danger of a US economic recession.

Last Sunday, Goldman Sachs' economics team raised their prediction of the likelihood of the US economy entering a recession in the next 12 months from 15% to 25%. Additionally, JPMorgan Chase recently raised the likelihood of the US economy falling into a recession by the end of the year from 25% at the beginning of last month to 35%.

There are differing opinions on when the current adjustment phase will end.

J.P. Morgan analyst Thomas Searopack published a research report revisiting historical market bottoms.The market has not yet shown a clear 'bottom signal'.The company stated.

Three indicators - worsening credit spread, steepening of the US bond yield curve, and rise of defensive sectors - indicate that the current market is in a slump.

On the other hand, Bank of America presents the opposite view. Sabita Subramanian, the Chief Equity and Quantitative Strategist, stated that the recent sharp decline in US stocks is merely a common technical correction and the possibility of a full-fledged bear market is low, and the market is still unable to see the top of stock prices."A correction of more than 5% is common and it has happened more than 3 times on average per year since 1930 (this year is the second time following April). More significant corrections are less frequent, but they are still common, and corrections of more than 10% happen on average once a year (most recently in the fall of 2023)," Subramanian stated in the report.This encouraged the market.

-The IT bubble of 1999: Do not get involved in unfamiliar industries.
In 1999, the IT bubble peaked, but Mr. Buffett advocated the principle of 'not making more money than his abilities' and refused to invest in unfamiliar technology stocks.

Even when provoked, he claimed 'I will not participate in games where others have an advantage over me,' believing that the value of the American stock market already greatly exceeded the economic growth rate, and the performance of the Dow average for the next 17 years would not greatly exceed that from 1964 to 1981 unless the market crashed.

In 1999, when the stock market saw a 21% increase in the S&P 500 index and a 66% surge in the Nasdaq index, Berkshire's market capitalization dropped by nearly 20%, marking the second-worst performance since 1990.

However, by March 2000, the IT bubble finally began to collapse, and by 2001, it completely collapsed, which Mr. Buffett managed to avoid successfully.

-2008 Global Financial Crisis: Be greedy only when others are fearful.
In 2008, a global financial crisis broke out, with the Dow Jones Industrial Average dropping 52% from peak to trough, and both technology and traditional industrial stocks plummeted.

However, amid the market pessimism, Mr. Buffett famously said in October 2008, " Be fearful when others are greedy, and be greedy only when others are fearful.".

From September to October 2008, Mr. Buffett started buying at the lowest point, $Constellation Energy (CEG.US)$, Tangram, $Goldman Sachs (GS.US)$, BYD, $GE Aerospace (GE.US)$and other stocks in large quantities. $Wells Fargo & Co (WFC.US)$Berkshire's shareholdings were valued at $15.1 billion. $Associated Capital (AC.US)$He purchased Goldman Sachs shares.

Goldman Sachs stock fell from $125 to $53, and General Electric stock fell from $22.15 to $14.03. However, Buffett purchased preferred shares with a fixed annual return of 10%, which allows the company to generate substantial profits every year as long as it does not go bankrupt.

Five months after the famous quote, US stocks began to hit bottom, heralding the arrival of a bullish market lasting 10 years. Buffett and Berkshire again achieved significant growth in assets and earned over $10 billion in investment returns during the financial crisis.

-2020 New Coronavirus: Cash is king, waiting for opportunities.
Amid the spread of the 2020 novel coronavirus, global stock markets plummeted. Berkshire held a significant amount of cash and waited for opportunities. In the aftermath of the pandemic, Berkshire started making substantial investments in the Japanese stock market and invested 1.6 trillion yen in the five major trading companies, which appreciated to 2.9 trillion yen by the end of last year, resulting in a profit of $8 billion.

Why was Buffett able to build an unbeatable investment career?
In Buffett's investment career, the return on investment has been negative only in two years.The key to ensuring long-term profitability is to avoid losses or larger losses.This is the current situation.

Buffett's investment strategy involves capital allocation rather than asset allocation, unlike Bridgewater and other institutional investors.

1. The first investment, known as value investing in the market, involves finding securities that are trading at prices considerably higher than their intrinsic value.However, the market is constantly changing, and as stock index prices continue to rise and market valuations become more favorable, the number and size of undervalued securities decrease.

2. If it is difficult to find attractive investment opportunities with sufficient volume, Buffett adds arbitrage investments.In years when the performance of the Dow Average is not good, Mr. Buffett mainly relies on the contribution of arbitrage trading to maintain victory in the market and avoid losses, or minimize losses.

3. The first investment can be converted into the third investment. After gaining control, Mr. Buffett disregards market price fluctuations and rather treats his investments as an owner.Therefore, Mr. Buffett is very strict with both investment opportunities.

In capital allocation, Mr. Buffett can secure long-term profitability by searching for investment opportunities that meet his requirements at various stages of the market and adjusting capital in different portfolios.

In addition, Mr. Buffett aims for long-term capital growth in his portfolio and has a high tolerance for short-term market fluctuations.When considering long-term goals, risks cannot be measured by short-term market volatility, but rather should be defined in terms of permanent capital loss.

To address the risk of permanent capital loss, Buffett's approach is to seek a larger margin of safety. The optimal margin of safety is the limit where even in the worst-case scenario, no loss is incurred. This is one of the reasons why Buffett has been able to overcome bear markets.

Source: moomoo
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This article uses auto-translation in part.