Over the past year, Warren Buffett has increased Berkshire Hathaway’s (NYSE:BRK.B) cash, cash equivalents, and short-term investments in U.S. treasury bills by $58 billion. When asked why he sold shares in Apple (NASDAQ:AAPL), Warren seemed to slip up in his response, revealing his true thoughts on the U.S. stock market. Therefore, I’m bullish on the iShares Short Treasury Bond ETF (NASDAQ:SHV), which mirrors Buffett’s investment in short-term treasuries.
Why Buffett Is Increasing His Cash Position
At the Berkshire AGM, CNBC‘s Becky Quick asked Warren why he’s been trimming his stake in Apple. Buffett began by saying that Apple is an even better business than Coca-Cola (NYSE:KO) and American Express (NYSE:AXP) and that Apple will remain Berkshire’s largest investment at the end of 2024.
Apple is a very large stake for Berkshire, and it would take a long time to sell it entirely. It’s difficult to tell if that’s Warren’s intention. Apple made up 50% of Berkshire’s equity portfolio at the end of 2023, and the stake was valued at $174.3 billion. However, Buffett has been selling big time. With the release of Berkshire’s latest 10-Q filing, the Apple stake was valued at just $135.4 billion.
What Buffett said next was very telling. He said, “I don’t mind at all, under current conditions, building the cash position. I think when I look at the alternative of what’s available in the equity markets, and I look at the composition of what’s going on in the world, we find it quite attractive.”
Berkshire Hathaway’s cash, cash equivalents, and short-term investments in U.S. treasury bills increased from $131 billion in Q1 of 2023 to $189 billion in Q1 of 2024. This is absolutely staggering. That’s a $58 billion increase over one year.
So, let’s unpack Buffett’s comments. Why does Buffett not mind building his cash position, and why does he find cash attractive compared to stocks? Well, because of what the Federal Reserve is doing, a one-month treasury note currently yields 5.36%, and a one-year treasury note currently yields 5.14%. This is quite an attractive payment for a U.S. government bond. Yields haven’t been this high since 2007.
Next, the U.S. stock market is downright expensive. The S&P 500’s (SPX) P/E ratio is sitting at 27.6x. The inverse of that means you’re getting a 3.6% earnings yield if you buy the S&P 500.
With the unemployment rate sitting near all-time lows, it’s difficult to make the case that S&P 500 companies are under-earning. In fact, I believe most of them are over-earning. S&P 500 operating margins are still quite stretched, and corporate tax rates are low. So, this 3.6% earnings yield could shrink in the event of a recession, possibly taking the market down with it. This may be why Buffett likes the safety of high-yield treasury notes.
In Buffett’s annual letter to shareholders, he seemed to say the market has gotten somewhat speculative in recent years, and he may be anticipating better opportunities in the future.
Buffett said, “Berkshire’s ability to immediately respond to market seizures with both huge sums and
certainty of performance may offer us an occasional large-scale opportunity. ~ Markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”
Apple Has Issues to Overcome
At a P/E ratio of 29.5x, Apple has a 3.4% earnings yield. It also has a number of geopolitical risks with its business in China. While Apple is a terrific business now, with extremely high margins, it’s difficult to understand if the company will maintain its technological edge over the years. At its current valuation, investors certainly need it to do so.
Buffett Thinks Higher Taxes Are Likely
Near the end of Buffett’s response to Becky Quick’s question, he also said, “With the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely.”
If this prediction comes to fruition, higher corporate taxes could further squeeze the S&P 500’s and Apple’s net margin. Buffett also said he doesn’t mind paying capital gains tax because, after all, capital gains rates could always be higher in the future.
Why Does Buffett Prefer Short-Duration Treasuries?
So, why is Buffett not investing in long-term bonds? I believe Buffett likes short-duration treasuries because if the market crashes, they roll over quickly and provide liquidity and safety of principal.
Even if treasury yields were to increase to 10%, Buffett’s short-duration notes would roll over quickly, and he could simply reinvest at higher rates, achieving compound interest. If he owned long-duration bonds, they would likely decline in value as interest rates increase.
SHV ETF: My Weapon of Choice for High-Interest Cash
I clone Buffett’s trades selectively because, after all, Buffett could be wrong. I cloned Buffett in 2020, buying Berkshire Hathaway stock when Buffett began repurchasing shares, and again in 2022, when I saw Citigroup (NYSE:C) stock was trading at a deep discount to the price Warren Buffett bought. I also owned international energy companies in 2022 and 2023, when Buffett was buying oil stocks.
Now, I’m cloning Buffett again. I currently have 25% of my portfolio in the iShares Short Treasury Bond ETF. This ETF invests in U.S. treasury bonds with maturities of one year or less. It has an average yield to maturity of 5.33%, holds over 30 U.S. treasuries of varying short maturities, and pays me a dividend on a monthly basis. See its dividend history below.
Most importantly, this ETF doesn’t fluctuate much in price. Over the past 10 years, the ETF has traded at a low of $109.76 and a high of $111.05. For me, holding SHV is the easiest way to clone Buffett’s huge position in short-term treasuries.
Now, am I a “permabear” or a doomsayer? By no means. This cash position simply offsets my other more aggressive bets. But by holding SHV shares, I have the cash available to buy low should there be volatility or a recession.
The Bottom Line
Short-term treasuries currently have a better yield (over 5%) than the earnings yield on the S&P 500 (3.6%). This hasn’t happened since the dot-com bubble. Therefore, Buffett insinuated that he sold Apple shares to increase his cash position. I see this as a bearish move by Buffett.
I currently hold 25% of my portfolio in the iShares Short Treasury Bond ETF, which effectively clones Buffett’s investment in short-term treasuries. I like the 5%+ yield. And should the market correct, I can take my cash and go bargain hunting.
