Buffett's Cash Hoard Surpasses $334 Billion Amid Concerns of Abnormality

Berkshire Hathaway's Record Cash Reserves Raise Questions About Investment Strategy

Warren Buffett's Berkshire Hathaway reported an impressive 71% increase in fourth-quarter operating income compared to the previous year, driven by strong performance in the insurance sector and improved Treasury bond investments amidst high interest rates. According to the company's annual report released on February 22, 2025, the operating income for the fourth quarter of 2024 reached $14.53 billion, up from $8.52 billion a year earlier. For the full year, operating income amounted to $47.44 billion, reflecting a 27% increase from 2023.

The insurance division, a core part of Berkshire's operations, showed significant recovery with underwriting revenue surging approximately 302%. GEICO, a prominent auto insurer, reported pre-tax underwriting profits of $7.8 billion, nearly doubling from the previous year. This resurgence was attributed to an increase in new customers and a shift in the market after a period of poor performance, facilitated by rate hikes.

However, the company expects to reflect the impact of recent wildfires in Los Angeles and other areas in the first quarter results, estimating pre-tax losses around $1.3 billion. Berkshire Hathaway confirmed it is closely monitoring the situation. In the annual report, Buffett reiterated that "quarterly investment gains and losses are generally insignificant and can mislead investors," noting that 53% of its 189 business units experienced decreased profits.

Berkshire Hathaway's cash reserves have surged to $334.2 billion (approximately 480 trillion KRW), a striking increase from $167.6 billion in the fourth quarter of 2023. This dramatic rise in cash has led to speculation regarding preparations for an economic downturn or succession planning for Vice Chairman Greg Abel. However, the annual letter did not provide a clear explanation for this cash accumulation.

Buffett countered criticisms regarding the company's cash holdings, asserting that despite perceptions of excessive liquidity, the majority of its assets remain invested in stocks. He emphasized that holding cash is less advantageous compared to maintaining high-liquidity investments in publicly traded equities. Although he did not elaborate on potential future investments, he pointed out that while the value of stocks held fell from $354 billion to $272 billion, the value of wholly owned subsidiaries increased significantly, underscoring progress in returning value to shareholders despite concerns of selling off assets.

Berkshire Hathaway, a diversified conglomerate, oversees several sectors including insurance (GEICO, General Re, NICO Group), railroads (Burlington Northern Santa Fe), utility services (Berkshire Hathaway Energy), and consumer goods. The company has historically leveraged cash generated from its insurance operations to acquire substantial stakes in major companies like Apple, Bank of America, American Express, Coca-Cola, and Chevron. During the pandemic in 2022, it allocated 28% of its cash to acquire the insurance company Alleghany for $11.6 billion, along with increasing investments in Chevron and Occidental Petroleum.

In the current landscape of 2023 and 2024, as technology stocks gained momentum, Berkshire Hathaway reduced its stake in Apple by approximately two-thirds, decreasing from 900 million shares to 300 million. It also offloaded over 117 million shares of Bank of America in the fourth quarter alone, part of a broader strategy to enhance cash reserves. Concerns about Apple's growth slowing and a potential economic recession likely influenced these decisions. However, Buffett clarified at last year's shareholder meeting that these moves were a response to government tax concerns, rather than a sign of a major strategy shift. In contrast, the company continued to invest in Occidental Petroleum, acquiring an additional 8.9 million shares due to its strong dividends and position in the energy sector.

In his letter, Buffett reaffirmed his commitment to investing in Japan's top five trading companies, retaining stakes of less than 10%. He highlighted that the dividends received and investments in yen-denominated bonds help bolster returns. As of the end of last year, Berkshire's investment in Japan totaled $13.8 billion.

Buffett also acknowledged that "Berkshire makes mistakes," having consistently mentioned errors made since 2019 in annual letters to encourage accountability. He stressed that "the greatest sin is delaying the correction of mistakes" and emphasized the need for prompt action, regardless of discomfort.

In 2022, Berkshire Hathaway acquired about 15% of Paramount Global, but faced a $1.5 billion loss from selling its shares after poor performance in traditional TV networks. Similarly, HP faced a substantial loss after investing $4.2 billion, while also divesting from certain companies like Ulta Beauty shortly after acquisition, indicating a trend of ongoing portfolio adjustments.

Buffett reaffirmed that Vice Chairman Greg Abel would eventually take over writing the annual letters, stating he shares the belief of being accountable to shareholders. Despite not paying dividends, Berkshire Hathaway repurchased $9.6 billion of its shares last year, focusing on enhancing shareholder value. Looking ahead, Buffett noted that any stock buybacks would consider long-term value creation rather than short-term fluctuations.

Buffett's letter also addressed corporate tax cuts, emphasizing the transformative power of capitalism over the past 235 years. He acknowledged the imperfections of the American economic system but stressed that effective capital allocation can yield miraculous results. Last year, Berkshire paid $26.8 billion in corporate taxes, accounting for 5% of the total corporate taxes collected in the U.S., urging the government to use tax revenues wisely.