Warren Buffett's Berkshire Hathaway Inc. posted record third quarter earnings of US$52 billion ($75.3 billion) thanks to strong return on the share market as its cash pile hits US$128 billion – the most on record.
It sounds like a ringing endorsement for stock market bulls around the world, but if you pause and think about this for a minute, it's actually quite a worrying sign that ASX investors should pay attention to.
Berkshire's great quarterly result was driven in part by record earnings from BNSF railroad, Buffett's biggest-ever acquisition, as well as gains on his other investments, according to Bloomberg.
Are we close to the top of the market?
The thing is, Berkshire sold more shares than it bought during the period and its record cash buffer puts a spotlight on a conundrum that many fundamental value investors have been grappling with for most of 2019 – the lack of buying opportunities.
If Buffett can't find value, should the rest of us be worried about chasing the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index higher?
In many respects, value investors like Buffett are playing chicken with the raging bull market. These investors are sitting on a mountain of cash and it'll soon start hurting as their investment returns will underperform their benchmarks as cash earns next to no returns in this environment.
All cashed-up and nowhere to go
Value investors need a sharp market meltdown to regain an upper hand, and trying to predict when that will come is like forecasting when the drought here will break.
It's true that Buffett's challenges are unique as the rest of us mere mortals do not have try turning the Titanic in a bathtub – meaning Berkshire has so much cash that it needs to strike a mega deal to move the needle on the company's returns.
It doesn't help that animal spirits are alive and kicking as there are few instances where share prices are treading below fundamental value.
Buffett wrote a US$10 billion check in the September quarter for Occidental Petroleum Corporation so that it can seal a deal with Anadarko Petroleum Corp, but experts don't think there will be more of such deals in the near-term to lift earnings growth for Berkshire.
Markets close to an inflection point
Having a huge mountain of cash can burn a hole in your pocket, but luckily for most of us, this isn't as big an issue. This isn't to say that many investors have a lazy balance sheet too. There are several fund managers who are sitting on a lot of cash too, and not by choice!
You'd have to think that each day the bull market lives, the greater the pressure for Buffett and these fund managers to deploy their cash pile. This wall of money will give stock indices a further boost.
The question is who will blink first.
