Buffett Reduces U.S. Stock Exposure Over Scoundrels and Fiscal Folly

Warren Buffett, the legendary investor and chairman of Berkshire Hathaway, has taken a notably cautious stance, with over half of his company’s net assets now held in cash and U.S. Treasury bills. This shift marks a departure from his usual optimism, as he currently holds more cash than investments in publicly traded U.S. stocks.

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In his latest annual letter to shareholders, the 94-year-old Buffett veered away from his traditionally patriotic tone, instead issuing warnings about economic risks. He expressed concerns over America’s “fiscal folly” and cautioned against “scoundrels and promoters” who exploit those who place misguided trust in them. Acknowledging the nation’s challenges, he remarked, “The American process has not always been pretty.” This contrasts starkly with his previous bullish outlook—just four years ago, he urged investors to “never bet against America.”

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For those analyzing Berkshire’s latest financials, Buffett’s comments and investment decisions highlight the appeal of Japanese conglomerates, which he has been quietly accumulating since 2019. These “mini-Berkshires,” as they are often called, may present attractive opportunities.

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Buffett, whose longtime business partner Charlie Munger passed away just over a year ago, is currently the world’s seventh-richest individual, with a net worth of $150 billion, according to Forbes. Since the 1950s, he has built his fortune through astute stock market investments, first managing a private partnership before transforming Berkshire Hathaway into a diversified investment powerhouse.

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His investment acumen has consistently outperformed market indices, though some analysts argue that his success largely stems from his disciplined approach—focusing on high-quality companies and leveraging the low-cost capital generated from Berkshire’s insurance operations.

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The most revealing aspect of Berkshire Hathaway’s annual report is its balance sheet. The company’s cash and equivalents, mainly held in U.S. Treasury bills, have reached an unprecedented $345 billion—nearly double the amount from a year prior. This massive cash reserve now constitutes 53% of Berkshire’s net assets.

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Interestingly, Berkshire’s stock holdings currently total $270 billion, meaning Buffett now holds more in cash than in publicly traded stocks. A year ago, the firm had nearly twice as much invested in equities as it did in Treasury bills, highlighting a significant shift in allocation.

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Buffett’s cautious positioning coincides with U.S. stock markets reaching record highs. According to the “Buffett indicator,” which compares the total value of the U.S. stock market to the country’s gross domestic product, equities are currently more expensive than at any point in history.

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Despite concerns about Berkshire’s growing cash pile, Buffett downplayed worries. He reassured investors, stating, “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities.” He emphasized that Berkshire continues to favor stocks, particularly American equities, though many of these businesses have significant international operations. “That preference won’t change,” he added.

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For investors seeking to align with Buffett’s strategies, the five Japanese conglomerates he has invested in may be worth examining. These companies, known as “trading houses,” include Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Buffett noted that these firms operate in a manner similar to Berkshire, each holding interests in a diverse range of businesses, both within Japan and globally.

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Buffett’s confidence in these companies and their leadership teams has grown over time, leading Berkshire to become a long-term investor. The firm holds just under 10% stakes in each of these businesses.

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Berkshire’s total investment in these firms amounts to $13.8 billion, and as of December 31, the holdings were valued at $23.5 billion. However, since then, the companies’ American depositary receipts have declined by an average of 8%. Despite this dip, the stocks remain attractively priced, trading at less than 10 times their projected earnings.

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Sumitomo is currently the cheapest, with a price-to-earnings ratio of 7.5, while Itochu is the most expensive at 9.7 times projected earnings. Dividend yields for these firms range from 3.3% to 4.2%.

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These valuations stand in stark contrast to the U.S. market, where stock prices remain significantly higher. For example, the S&P 500 currently trades at 22 times forecast earnings, reflecting the elevated valuations Buffett appears to be avoiding.

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Buffett’s recent moves suggest a heightened level of caution regarding U.S. equities. His growing cash position and shift toward Japanese investments indicate that he sees greater value abroad while remaining wary of high-priced American stocks. Whether this signals a broader shift in market conditions or simply a temporary stance remains to be seen.

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