Recently Berkshire Hathaway sold substantial parts of its investments in Bank of America and Apple. These two stocks have historically been Berkshire’s largest holdings. Meanwhile, we noticed a report by Business Insider that Berkshire Hathaway now owns more short term treasuries than the US Federal Reserve at $234.6 billion. Since short term treasuries are essentially cash, we are asking ourselves how much cash should an investor have? There are two issues in regard to a rational answer to this question. One has to do with having a safe financial cushion and the other has to do with holding money on the sidelines as one waits for investment opportunities.
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How Much Cash Before You Invest in Stocks?
Years ago we wrote an article about how to start investing in the stock market. As we noted back in 2017 and repeat today, you should not invest money that you cannot afford to lose. Common advice is that one should put aside enough money in a savings or money market account to pay all bills for six months. Then, and only then, should a beginning investor start to buy stocks. The best way to start investing is generally to use a dollar cost averaging approach and put equal dollar amounts into stocks every payday, month, or quarter.
Image Courtesy of Kansas City Federal Reserve
When Is Cash King and When Is It a Losing Proposition for Long Term Investors?
After the Financial Crisis interest rates remained historically low for years. Even though inflation was not rampant you probably lost purchasing power from any money held for years in a passbook savings account or even a short term CD. If you purchased longer term CDs or US treasuries you saw your bonds lose market value when the Fed raised interest rates from March 2022 to July 2023. The collapse of Silicon Valley Bank in late 2023 was caused by their holding massive amount of low interest rate bonds that lost market value when rates went to their highest in more than a decade. That having been said, anyone who had cash on hand when the Covid crash took the S&P 500 down 30% in early 2020. Anyone who bought an ETF that tracked the S&P 500 on March 20, 2020 and simply waited doubled their investment by the end of 2021! When markets are in a panic and everyone is bailing out cash is king and has been ever since Baron Rothschild noted during the market panic after the Battle of Waterloo that the best time to buy is when there is blood in the streets. Obviously Rothschild had cash on hand.
Who Is Holding a Lot of Cash These Days?
We started this article by noting how Warren Buffet’s Berkshire Hathaway is holding massive amounts of cash. He is not the only one. Bloomberg reports that private equity firms are holding $722 billion as they look for investment deals. The Kansas City Federal Reserve has written about how firms hoarding cash post pandemic. It would appear that the Federal Reserve, despite incessant hand wringing all around, is going to achieve the soft landing that it desired. It also appears that unless whomever takes over the White House and Congress messes up terribly, we are likely to see a strong to booming economy in 2025. It that is the case, then it makes sense that someone like Berkshire Hathaway or any of the patient private equity folks to are constantly looking for deals have been stockpiling cash and waiting for the right moment.
When Do You Have Too Much Cash?
While lots of successful and smart folks are stocking up on cash, it may not always be the best idea. Over the long term the stock market and real estate tend to outperform bond and CD yields in staying up with or getting ahead of inflation. When your cash stockpile greatly exceeds your needs for years to come and you are seeing its purchasing power dwindle year after year, it is time to look for investments that provide a better return. If you are not interest in researching stocks, managing a portfolio, or paying exorbitant fees to someone else, there is an option. Warren Buffet has said that folks in exactly that situation should consider putting money into an ETF that tracks the S&P 500 and essentially forgetting about it.