For disciples of billionaire investing guru Warren Buffett, now might be a very good time to hold cash. With Berkshire Hathaway stock hitting a 52-week high, handsomely outperforming the S&P 500 over the past two years, it’s pretty clear that being “greedy when others are fearful, and fearful when others are greedy” is a winning strategy.
With help from our friends at investormill, we took a look at the correlation between Berkshire Hathaway’s cash position and the broader U.S. stock market, using the S&P 500 as a proxy.
Buffett is among the most disciplined investors, happy to sit on the sidelines for several years if need be until he sees value. Looking at Berkshire Hathaway’s cash position – a staggering $55 billion – it’s evident that he remains as disciplined as ever, building up cash just as others are so eager to spend theirs amidst an ever-frothier market. When the market dips, he can be expected to deploy this cash, taking advantage of “time arbitrage” – the ability of investors with longer time horizons to reap outsized gains. Family offices and private equity funds (and their investors) are other beneficiaries of this model of investing.
What does this mean for individual investors?
With U.S. households sitting 40% in cash (even high net worth households are holding an astounding 31% cash), some would argue that the equity market has a lot longer to run. But many investors still recall the pain of the financial crisis, and savvy investors profited handsomely by having dry powder on the sidelines, so that they could plow money into equities at precisely the time that everyone else was selling anything that wasn’t nailed down. Those brave enough to buy into the S&P 500 at its low of 676 in March of 2009 have nearly tripled their money by this point.
As I mentioned recently during an interview with Christine Benz at Morningstar, many investors are holding a disproportionate allocation of cash because fixed income seemingly has nowhere to go but down given the expectation that interest rates will rise. Yet they don’t want to deploy the proceeds into equities or other asset classes, so the funds sit in cash by default. In this environment, it becomes all the more important that this large cash allocation earn as much as it can without risk of loss of principal.
FDIC-insured online bank accounts seem like a smart place to store this cash. We developed MaxMyInterest to help investors earn as much as possible on cash by helping spread it out across some of the leading names in online banking. Max members are earning a weighted average of 0.88% today, far more than most bank accounts, money market funds, or even CDs. Their cash remains liquid, held in their own names, at their own accounts at leading FDIC-insured banks. Yet when interest rates change, their cash automatically migrates to the banks offering the best rates, so that they can continue to maximize their yield while remaining liquid, ready for the next market opportunity.
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- How the 2008 Financial Crisis led to a better way to manage cash - April 28, 2020