Why Warren Buffett is Prepping for a Stock Market Crash...

Warren Buffett's recent actions have

many people concerned that Buffett is

preparing for a 40% decline in the stock

market Buffett's cash pile just hit

another record high hitting a staggering

$325 billion to put this number in

perspective this is enough cash to buy

the entire companies of McDonald's

Starbucks BMW Delta Airlines and Ford

combined today Berkshire hathway Warren

Buffett's holding company is keeping 3

$25 billion of cash on the sidelines for

a company whose sole purpose is to be

investing that cash into stocks and

entire businesses this has longtime

followers of Warren Buffett extremely

concerned many are interpreting this

move as Buffett's way of preparing for

an impending stock market crash the

thought being that Buffett is aware of a

significant decline in the stock market

on the horizon and that Buffett is

stockpiling cash ahead of this crash

this seems to contradict Buffett's claim

of never trying to time the stock market

one of Buffett's most well-known quotes

is I make no attempt to forecast the

market my efforts are devoted to finding

undervalued Securities if Warren Buffett

claims he doesn't attempt to predict the

stock market why then do so many people

interpret Buffett selling stocks and

stockpiling cash as Buffet seen danger

ahead for the stock market well let's

just say despite claims to the contrary

Buffett has an incredibly impressive

track record of predicting stock market

declines take a look at this chart here

in Orange you have the price of the S&P

500 Index broadly considered a proxy for

the US Stock Market on the gray bars you

have the cash pile at berer haway as you

can see here Buffett has quite the

impressive track record of piling up

cash ahead of every major decline in the

stock market he then uses that cash pile

to take advantage of discounted prices

to make some of his largest most

successful Investments of his career

take a look at the Doom bubble of the

late 1990s and early 2000s Buffet grew

the burshire cash pile to what was at

the time record levels ahead of the

bubble bursting in the year 2002 after

the bubble had burst Buffett made one of

his most successful Investments of all

time acquiring 90% of the shares

outstanding of utility company Mid

American Energy Holdings for $1.64

billion the business has since been

rebranded to birkshire hathway energy

and is now estimated to be worth is

staggering 90 billion currently If berer

hathway energy was a standalone publicly

traded company it would likely be in the

top 100 largest companies in the S&P 500

by market cap no wonder Buffett

considers this business one of the four

quote crown jewels of Berkshire Hathaway

then there is the great financial crisis

as you can see in the chart here Buffet

built up a massive amount of cash ahead

of the stock market decline starting in

2007 as the stock market plunged Ed over

the following few years you can see

Buffett spent down the cash pile going

bargain hunting for Great Deals this

included buying the railroad Burlington

Northern Santa Fe for a whopping $26

billion in 2009 during the height of the

economic Panic BNSF is now worth an

estimated $150 billion putting buffets

return on investment well above $100

billion Buffett's current cash pile

makes these examples look tiny by

comparison

at $325 billion Buffett's cash pile is

nearly seven times larger than the

previous Peak hit back in the 2006 to

2007 time period you see the storm that

is currently brewing in the stock market

traces its roots back to roughly 15

years ago to 2009 March 6th 2009 to be

exact on this date the S&P 500 hit its

low Point closing at

676.53 the lowest level since 1996

however this day kicked off arguably the

longest and strongest bull market in the

history of global capitalism the S&P 500

has nearly 10x since that low Point hit

in 2009 to over 6,000 as of the making

of this

video starting in 2012 Buffett's cash

pile has grown nearly every single month

in lock step with the incredible rise of

the stock market as the bargain that

made Buffett the greatest investor of

all time increasingly became more

difficult to find there there was a

brief exception in the year 2022 when

Buffett reinvested part of his cash

stock pile back into the market in 2022

Buffett spent roughly $68 billion buying

stocks including 23 billion and 11

billion on oil and gas company Chevron

and accidental

petroleum however this was just a

temporary blimp as since then Buffett

has resumed building up his cash pile

even going as far as to sell $100

billion worth of birchers holding an

apple a position he previously said

would never be sold Buffett is famous

for being a long-term investor he has

said countless times his favorite

holding period is forever as Buffet

knows that selling a stock at the wrong

time is a huge investing mistake that

costs investors a lot of money if you

are interested in seeing all six

mistakes investors need to avoid

according to Buffett you can check out

the downloadable PDF in the description

of this video completely for free get

your hands on your free copy because

it's my GI to you for supporting the

channel now part of the reason for this

dramatic increase in cash is that

Berkshire hathway the company is

significantly larger than it was decades

ago in 1990 berkshire's market cap was

approximately $5

billion by the year 2000 that number had

grown to 130 billion in 2010 Buffett's

market cap was pushing $200

billion now Brookshire Hathway's market

cap is roughly $1

trillion because of the significant size

growth of Berkshire hathway it's not

enough to Simply look at the cash number

in absolute terms to truly understand

what Warren Buffett is thinking you have

to look at the cash pile as a percentage

of Berkshire Hathway's total assets as

of the making of this video that cash

holding stands at around 30% Berkshire

Hathway's cash Holdings represent about

30% of the entire company's assets

comparing that 30% number to historical

levels does nothing to alleviate

concerns that Buffet thinks the stock

market is

overvalued take a look at this chart of

berkshire's cash Holdings as a

percentage of total assets as we can see

here that 30% number is the largest

reading in the entire publicly available

data set on Berkshire hathway dating all

the way back to the year

1990 the previous Peak was 25% during

the buildup to the great financial

crisis a period of time where the S&P

500 went on to fall nearly 60% from its

peak and took over half a decade to once

again return to levels hitting during

the peak another way to look at

Buffett's cash pile is to compare it to

the amount of stocks that he owns as of

the making of this video Buffett's cash

pile stands at a staggering

325 billion dollar compare that to the

approximate $300 billion worth of stocks

he owns as of the making of this video

Warren Buffett is holding more cash than

he is stocks this is a shocking and

radical Divergence Buffett who claims

that it is foolish to try to time the

market take a look at this chart here

showing berkshire's Investment Portfolio

broken down by stocks AKA equities in

Blue Cash in green and fixed income

otherwise known as Bonds in red as we

can see here Buffett has historically

held significantly more stocks than cash

and bonds that has all changed as of

late as you can see here for the first

time in decades Buffett is holding more

cash than he is stocks if you are an

follower of Buffett like myself you know

exactly why he is making this very

uncharacteristic move let me explain

Warren Buffett considers the single most

important investment book The

intelligent investor written by

Buffett's Mentor Ben Graham in this book

it lays out an investment principle that

Buffett has adhered to ever since he was

a college student in Ben Graham's

classroom this strategy is a large

reason why Buffett has been so

successful investing in the stock

market this principle from the

intelligent investor states that when

stock prices and valuations are low you

want to have a very large percentage of

your portfolio in stocks however as

stock prices and valuations increase you

want to reduce your exposure to the

stock market put another way when the

stock market is cheap you want to have

more exposure than when it is expensive

today by historical standards the stock

market is expensive to say the least on

seemingly every imaginable metric one

popular metric to determine whether the

stock market is overvalued is to look at

what is referred to as the cyclically

adjusted price to earnings ratio this is

very similar to the regular PE ratio but

rather than using the most recent annual

earnings data the cyclically adjusted PE

ratio looks at current stock prices

divided by the average earnings over the

prior 10 years by looking over a 10year

period the cyclically adjusted PE ratio

helps reduce the high volatility of the

normal PE ratio caused by a company's

profitability shifting dramatically from

one year to the next as you can see here

the cyclically adjusted PE ratio is at a

staggering

36.5 well above the long-term average of

around 20 dating back to the year

1950 put another way the current

valuation of the US Stock Market is

roughly two standard deviations above

the long-term average suggesting the

stock market is in the strongly

overvalued range the most recent time

the stock market was this overvalued was

in 2021

the following year the S&P 500 and

NASDAQ index went on to have one of the

worst years on record the S&P 500 fell

by nearly 20% and the NASDAQ cratered by

33% it's not just PE ratios showing the

stock market is overvalued Buffett's

single favorite stock market indicator

is flashing alarm Bells as well Buffett

is such a big fan of this tool that it's

even named after him the so-called

Warren Buffet indicator is calculated by

taking the total value of the US Stock

Market and dividing it by the size of

the US economy as measured by GDP as of

the making of this video the total value

of the US Stock Market was roughly 6.86

trillion the most recent reading for the

US GDP was 2924 trillion dividing the

value of the US Stock Market of 6.86

trillion by the US economy of 29.2

trillion we get a buffet indicator

reading of

208% but how does this compare to

history is the real question maybe it's

10% higher than the average maybe 20% or

if things are really stretched how about

30% not even close the buffet indicator

is a staggering 67% higher than the

long-term average according to the

buffet indicator relative to the size of

the economy the US Stock Market has

never been this overvalued in the entire

75 years this data has been tracked put

another way the US Stock Market would

have to fall by a staggering 40% from

its current levels for it to be

considered fairly valued using the

buffet indicator warm Buffett's

philosophy is to buy wonderful

businesses at fair prices with today's

stock market prices it's no surprise

that Buffett is having difficulty

finding attractive investment

opportunities combine that with the fact

that the yield that you get from holding

cash is at its highest level in decades

this makes cash a relatively attractive

alternative to the stock market for

cautious investors like Buffett

this is a key investing principle from

the intelligent investor when the yield

that you can get from cash is similar or

even higher to the yield that you can

get from stocks you should have a larger

percentage of your portfolio in cash as

you can see on this chart for the first

time since the dot bubble yields on cash

now exceed earnings yields from owning

stocks when this last happened more than

25 years ago in the.com bubble it took

over a decade for the stock market to

recover to levels hit during the peak of

the bubble ultimately only time will

tell if investors today will experience

another lost decade of stock market

returns however based on Buffett's

actions things aren't looking so

promising if you're interested in

learning more about Warren Buffett's

approaches to investing I put together a

completely free Warren Buffett

investment checklist that you can

download at the link in the description

make sure to check it out because it has

already helped thousands of people just

like you learn about how to invest like

warm Buffett

additionally since you made it this far

in the video it is obvious that you are

serious about learning about

investing with that being the case make

sure to check out this video here on

Warren Buffett and the storm brewing in

the US real estate market I will see you

over there