Buffett accumulates an unprecedented mountain of liquidity that sends a serious warning to the stock markets

Berkshire Hathaway , the listed company owned by Warren Buffett that collects the investment portfolio of the magnate and the firm's shareholders, has presented its portfolio at the end of 2024, accompanied by the letter to investors that Buffett himself writes every year to summarize the company's performance in the year and the changes in positions in the portfolio that have been carried out. The publication over the weekend has become an alarm signal for the markets, due to the exposure to liquidity that Buffett has reached at the end of 2024: the investment holding company maintains 334,000 million in cash, the largest amount in its entire history , which suggests that Buffett is protecting himself against a possible correction in the stock markets, taking into account the high valuations at which the American stock market is now paid.

For an investor who maintains the philosophy of always being in the market, such as Warren Buffett and, especially, in the American stock market, an increase in liquidity such as the one that has occurred in 2024 is a worrying sign for the stock markets. Berkshire Hathaway, the tycoon's investment vehicle, has already been increasing its liquidity reserves for ten consecutive quarters, to the point that these have reached a new historical maximum for the firm, at 334.2 billion dollars.

The figure is enormous, considering that the company holds positions in listed companies worth 272 billion. However, Buffett does not want this figure to be misinterpreted, and insists in his annual letter that "the value of listed companies continues to be greater than the liquidity position we hold," he explains, and that this is a strategy that will always be followed by the company.

Buffett does not refer in the document to the current valuations on Wall Street, which does not mean that the increase in liquidity has no relation to them. The famous investor has always been known for his methods of searching for value, in which it is key to find attractive companies, but, above all, to pay advantageous prices for their shares, and not to enter into moments in which there may be an overvaluation.

In this sense, Wall Street is not cheap: in mid-January the S&P 500 began trading 20% ​​above historic P/E (earnings multiplier) levels, confirming, for many, that the largest stock market on the planet had entered bubble territory. For other investors, the fact that the 10-year US bond already offers an average yield to maturity higher than that offered by the index's projected earnings (the S&P's 'equity earnings' indicator), is a clear sign of overvaluation for the stock market , and could only be reversed in two ways: either the stock market price falls, or earnings increase rapidly, until this ratio is balanced and the stock market once again offers more profitability than the bond, something natural in the market, taking into account the risks that investors assume in both assets.

The problem is that there is no expectation of a jump in corporate profits in the United States that would normalize this situation, and Buffett's own letter to his participants reflects this situation: "In 2024, Berkshire has done better than expected, considering that 53% of our 189 operating businesses have reported a decline in their income," explains the tycoon in the letter. In part, the holding company's good financial results in the year respond to "a large increase in our income from investments in Treasury bonds," Buffett acknowledges.

After reporting to the US regulator this weekend how its portfolio is distributed, it is clear that Berkshire maintains a strategy of enormous concentration in its investments. Although it is true that it invests in hundreds of companies, only the 10 companies with the largest weight in the portfolio account for more than 86% of the weight.

These are Apple, with 27.24% of the portfolio; American Express, with 14.9%; Bank of America, with 11.44%; Coca-Cola, with 10.4%; Chevron, with 6.33%; Occidental Petroleum, with 5.23%; Moody's, with 4.24%; Kraft Heinz, with 3.9%; Chubb, with 2.77% and Sirius XM Holdings, with 0.91%.

Buffett's annual letter includes several paragraphs in which the Berkshire founder boasts about the company's contribution to the US Treasury. After highlighting how, when he bought Berkshire 60 years ago, the company paid no taxes on its profits, simply because it was on the verge of bankruptcy, he said: "Imagine the Treasury's surprise when, 60 years later, and still operating under the same name, Berkshire has paid far more in taxes on profits than any other company in American history, even above the tech titans that have trillion-dollar valuations."

Buffett continues his proud message: "To be precise, Berkshire made four payments last year to the Internal Revenue Service, which totaled $26.8 billion, 5% of what the entire American corporate sector has paid that year," he insists.

However, for anyone who sees a hidden criticism of tax payments in these statements, suffice it to say Buffett's latest message on the matter: "Charlie [Munger] and I have always recognized that Berkshire could never have achieved its results anywhere other than America […], so thank you, Uncle Sam. Someday your Berkshire grandchildren will hopefully make even larger payments than those in 2024. Spend it wisely: take care of those who, through no fault of their own, were handed the short straws in life. They deserve more. And never forget that we need you to maintain a stable currency, and that requires both wisdom and vigilance on your part."