Why is Warren Buffett Holding Billions in Cash?

Why is he doing this? Is this a clue as to what we should be doing? Why would he be selling off when the stock market, the NASDAQ, tech stocks, and the entirety of the financial markets seem to be going up?

It appears that the economy is doing well, according to the pundits. The Federal Reserve just cut the federal funds rate by 50 basis points.

A 50 percentage point drop is very rare. Especially when the unemployment rate, the labor market, and the economy in general are said to be going very strong.

Warren Buffett has been around the block a couple of times. I think we should at least consider that not all is as it appears.

Should We Copy Warren Buffett’s Strategy?

Should we follow Warren Buffett's strategy to a T? Not necessarily. Warren Buffett, with Berkshire Hathaway, manages and invests billions of dollars. Most of us don't have anything close to that. We're dealing with much smaller amounts of money as retail investors.

Warren has to be much more careful with his large tranche of money because he has very limited places to store that much money in that quantity for a long amount of time.

Warren has stated that it’s been difficult to find good deals in the last 12 to 18 months. He requires larger deals, and they must make sense (be viable) in this current market.

He won’t just gamble his money away in whatever comes his way. So his problem is he has a lot of money and nowhere to put it. Therefore, he puts it in cash and short-term treasury bills and just waits.

This is where we can learn from him. Warren is extremely patient, especially for someone with billions of dollars burning a hole in his pocket.

It helps that he doesn't need to prove anything. He doesn't need to make more wealth. It's more of a game to him. For the rest of us, this game bears much more dire consequences.

The Economic Variables at Play – Investors Take Caution

We are dealing with a very volatile economy right now. Volatility = risk of loss. That's why Warren is sitting on the sidelines. He doesn't want to play the “see how much you can make off every investment” game right now.

He is not trying to get rich. He is trying to stay rich. 

Most of us have to keep our money working for us. We can't afford to sit on the sidelines too long due to inflation. As much as they say inflation is coming down, the deficit spending of our government will continue to devalue our dollar.

Inflation will be a major factor for the rest of this decade (at least).

Inflation will rear its ugly head even more with this decrease in the federal funds rate.

It has created a false market high while decreasing the purchasing power of the dollar. Precious metals have increased in value and will continue to do so as investors seek an inflation hedge.

This is the problem we have today. We feel like we're rich, but we don't have much purchasing power, so we must keep our money working for us.

How do we position our money for safety while maximizing returns above inflation? When do we go back into equities or add more to our equity positions?

Should we get involved in private credit? There are multiple opportunities to invest your money in treasuries (loaning money to our government) or in asset-based private lending. But you must understand where and how to do this.

The answer for me lies in the world of alternative investments. 

Alternative investments allow for a level of control as well as the security of real, tangible assets. That is why I love alternative investments. It’s why Warren loves alternatives (businesses specifically). He does very well in investing in businesses. I do well in real estate (my favorite asset).

Investing in tangible assets like businesses and real estate is outside the traditional investments of buying index funds, ETFs, and various annuities on Wall Street.

Tangible assets allow you to work with what the market gives you. You can adapt to the economic cycle, mitigating risk while still creating decent returns for growth and cash flow. But you have to be more prudent about your allocations.

Do You Know the Risks in Your Investments?

This is a time, like never before, when we have to be more prudent about where we put our capital. The days of “guaranteed returns” are over.

How do you learn how to find or evaluate how much risk an investment bears? What is the viability of a return on principal plus cash flow from any one investment?

You can spend years and years studying like Warren Buffett or you can fold time by finding the right education and the right people who are doing it together as a community.

Whatever you do, you must be more vigilant about the economy and marketplace. You have to intentionally choose to steward your capital the best you know how. If you don’t know how, seek education and the people with whom you can collaborate.