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Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) reduced the size of its stock portfolio during Q3. And the big question for investors is why.
One potential answer is to be ready for a stock market crash, but Buffett explicitly doesn’t predict such things. I think the real answer might be something very different.
What’s been going on?
It’s being widely reported (Fortune, Reuters, The Financial Times) that Berkshire Hathaway was a net seller of stocks during Q3. Whether or not that was Buffett is currently unclear.
This took the firm’s cash reserves up to a record $381.7bn at the end of the quarter. And while some of this is needed to cover potential insurance losses, there’s a lot more besides that.
In short, what’s clear is that Berkshire has been deliberately reducing the size of its stock portfolio. And it’s almost certain the reason isn’t just insurance reserves.
That might make investors wary that Buffett is setting up for a stock market crash. But, while I think the Oracle of Omaha is probably seeing something the rest of us aren’t, I doubt this is it.
The stock market
When it comes to Warren Buffett and the stock market, there are a couple of things that are easy to forget. One is that a lot of the market is too small to be relevant to Berkshire Hathaway.
If the firm buys more than 10% of a publicly-traded company, it becomes subject to stricter trading and reporting restrictions. And Buffett has previously viewed this as undesirable.
That means the company’s opportunity set in the stock market is pretty limited. To use even 15% of its spare cash, it would need to find a business with a market value above $572bn.
Within the S&P 500, only 17 stocks meet this condition and one of those is Apple, which Berkshire already owns. So, I don’t think Buffett is waiting for share prices to crash.
Investment opportunities
Finding opportunities to deploy Berkshire’s excess cash isn’t easy. And one of the key risks with the business is that its size makes it harder to generate meaningful growth.
It’s also worth remembering, though, that the company is in a position to make investments outside the stock market. And one area where I see potential opportunities is energy.
One of the big side effects of the rise of artificial intelligence is a huge increase in power consumption. But building energy infrastructure takes huge amounts of cash.
To a unique extent, Berkshire has this in spades. My guess (and it is a guess) is that being ready to take advantage of this kind of opportunity is part of what’s behind the company’s cash position.
Don’t try this at home
Investors (including me) love watching what Warren Buffett is up to in the stock market. But it’s easy to lose sight of the fact that Berkshire Hathaway has a unique opportunity set.
Unlike me, Berkshire is too big to make meaningful investments in most publicly traded companies. But I’m not in a position to build energy assets the way Buffett’s operation is.
I really like the firm’s position and I think increased demand for energy could generate some attractive opportunities. That’s why it’s my largest stock investment.
