Has Warren Buffett just played a blinder in the stock market?

Share prices have been falling as the implications of US tariffs hit the stock market. And that makes Warren Buffett’s decision to accumulate cash recently look like a very smart one.

At the end of 2024, his investment vehicle Berkshire Hathaway (NYSE:BRK.B) held $325bn in cash and $267bn in (US) stocks. So with plenty of ammunition in a falling stock market, has Buffett just done it again?

Cash reserves

Buffett’s routinely noted that the biggest risk to Berkshire is a catastrophic event causing huge insurance losses. And keeping cash in reserve is the best way of defending against this.

Despite this, selling stocks like Apple last year seems to go beyond what’s necessary to be in a position to cover losses. And from a share price perspective, the move hasn’t (yet) worked out.

While Apple’s share price has been falling, it’s still well above where it was at the start of Q4 2023 – when Berkshire began selling. This however, isn’t how Buffett generally thinks about stocks.

Selling shares

Buffett has often said his approach to investing in shares is based on the underlying business. Specifically, it’s about the cash the company can generate. At the start of the year, Apple shares were trading at a price-to-earnings (P/E) ratio of 37. And with sales largely static over the last few years, there are reasons to think it looks expensive.

More accurately, it makes it hard to see how Apple can return enough cash to investors to justify its share price. So it makes sense that Buffett might be looking to sell. In other words, he isn’t going to be proven right or wrong by what the Apple share price does. It’s going to come down to the company’s growth and cash flows.

My strategy

Unlike Buffett, I don’t have an insurance operation. That means I don’t have to think about cash reserves on the same scale (though I do have my own emergency fund). Nonetheless, I do try to focus on the same underlying principles that he says investors should stick to when it comes to stocks. And that means focusing on the underlying businesses.

While there are worse problems than having $325bn, there are some advantages to being a smaller operation. Not having to earn a return on that much cash opens certain possibilities.

Most of the stocks outside the FTSE 100 are just too small for someone with Buffett’s cash to pay attention to. But I’m looking carefully at some of the smaller UK stocks for opportunities.

Market timing

Whether or not Buffett’s managed to sell at just the right moment from a stock market perspective remains to be seen. But if he has, I don’t think it was on purpose.

The Berkshire Hathaway CEO has had terrific success by focusing on businesses rather than share prices. Sometimes though, things fall into place quite nicely.

At times like these, I’m glad to be a Berkshire shareholder. While my focus is on the UK right now, Buffett’s company is a permanent fixture on my list of stocks to consider buying.

The post Has Warren Buffett just played a blinder in the stock market? appeared first on The Motley Fool UK.

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Stephen Wright has positions in Apple and Berkshire Hathaway. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.