Buffett's cash reserves set record

Buffett has always been known for long-term holdings, but currently chooses to hold huge amounts of cash, including U.S. Treasury bills, worth US$325 billion, enough to buy all U.S. listed companies outside the top 25 by market capitalisation. Recently, he not only sold a large amount of shares in Apple (AAPL) and Bank of America (BAC), but also stopped increasing his holdings of Berkshire(BRK.B) shares for the first time since 2017. These actions show his prudent stance on the current stock market.

Low return expectations inhibit investment

Expectations for future market returns are generally low. Goldman Sachs strategist David Kostin predicts that the average annual return of the S & P 500 over the next decade may be only 3%, far below the long-term average after World War II. Vanguard's forecasts also show that large U.S. stocks will have annual returns ranging from 3% to 5%, while growth stocks will even be only 0.1% to 2.1%. Historical data from well-known economist Robert Shiller also shows that after deducting inflation, the average annual return may be only 0.5%. These forecasts undoubtedly cast a shadow on the market outlook and imply the risk of high valuation in the stock market.

Buffett Indicator: Markets overestimate risks

Buffett's "Buffett Indicator" emphasizes the importance of the overall valuation of the stock market relative to the size of the economy, which currently shows that the stock market is overvalued. The total market value of all U.S. listed companies is currently twice the size of U.S. GDP, exceeding the peak of the technology bubble, and Treasury yields even exceed the expected return of the stock market. This shows that if investors enter high-risk stock markets, they may face a situation where returns are not as good as risk-free investments.

Keep cash and wait for acquisition opportunities

Although Buffett hoards cash, he said Berkshire would not hesitate to make acquisitions worth $50 billion to $100 billion if there was the right target. Buffett's partner and friend Charlie Munger also emphasized that the basic principle of investment is to "not interrupt compound interest growth." However, as Berkshire's assets continue to grow, future returns may be difficult to reach past levels, and dividends may become an important way to reward shareholders.

Diversification: The potential of international and small stocks

Berkshire is mainly concentrated in the U.S. market, but for ordinary investors, under the current valuation pressure, they can consider allocating funds to potential areas such as non-U.S. markets or small stocks. Vanguard's forecast for non-U.S. markets shows that returns in mature non-U.S. markets are expected to be between 7% and 9% over the next decade, and U.S. small stocks are expected to be between 5% and 7%. These markets with more growth potential will help spread risk.