👉 Background: Warren Buffett started investing under the Berkshire Hathaway name back in 1965 with his mate Charlie Munger. He has grown Berkshire Hathaway to be valued at more than $970 billion USD. As part of his portfolio, he owns big name companies like Apple, Coca Cola, American Express and more.

👉 What happened: Now, Berkshire Hathaway has announced its quarterly change in shareholdings:

• There’s a significant sale in Apple stock
• There’s a chunky purchase of Domino’s Pizza
• But, most concerningly, Berkshire Hathaway has sold down shares so it holds more than $325 billion in cash on its balance sheet

👉 What else: To put that into perspective, that’s nearly double its cash balance at the 2023 year-end. And the reason for the cash hoarding? Well, Buffett has used a pretty consistent ratio to assess whether the stock market is overvalued or undervalued.

What's the key learning?

💡A pricey market today can mean slim returns tomorrow.

💡Within this year, the Nasdaq and the ASX200 both hit an all-time high. Buffett uses a simple ratio to evaluate if the stock market is overvalued or undervalued. He looks at the total value of the stock market relative to the size of the US economy (GDP).

• When this ratio is high, it means the stock market is more expensive relative to what the economy produces
• When the ratio is low, it suggests stocks are undervalued….meaning potential higher returns.
  

💡Over the years, Berkshire’s weighting of cash as a percentage of its assets has changed a lot. In 1994, only 1% of their assets were in cash, while right now, it’s closer to 28% today.