[Financial Planning for the 100-Year Life] The Significance of Berkshire Hathaway's Record Cash Holdings and Profit Decline

The asset management and operating results for Berkshire Hathaway (Berkshire), led by Warren Buffett, for the first quarter of 2025 have been announced. The key points are a record-high cash holding and a decline in profits. The decrease in profits was due to the fall in U.S. stock prices and the weakening of the dollar. This offers many insights for U.S. stock investors, especially those known as "Seohak Ants" (Korean individual investors in U.S. stocks).

Berkshire’s cash and short-term investments in the first quarter of 2025 reached $347.7 billion, the highest in its history. This amount accounts for 30.9% of its total assets of $1.124 trillion. This indicates that there were few assets deemed suitable for investment.

Berkshire’s operating profit for the first quarter was $9.64 billion, a 14.1% decrease from $11.22 billion a year earlier. In particular, net profit dropped sharply from $12.7 billion to $4.6 billion, a decrease of 63.8%. Insurance losses due to wildfires in California were a factor in the profit decline. However, losses from stocks and foreign exchange were even greater. Due to the decline in the share prices of major holdings such as Apple, stock valuation losses amounted to about $6.4 billion. For reference, Apple accounts for 22% of Berkshire’s equity holdings. Buffett criticized tariffs as being at the level of "acts of war" and said they are neither right nor wise; looking at the stock performance, his remarks seem reasonable.

Berkshire also suffered a loss of about $700 million in foreign exchange during the first quarter due to the weakening dollar. This loss occurred in the process of converting euro- or yen-denominated debt held by some of Berkshire’s subsidiaries.

The decrease in Berkshire’s net profit in the first quarter was attributable to the decline in stock prices and the weakening of the dollar. Will U.S. stock prices rise and the dollar strengthen in the future? My answer to this is negative. First, U.S. stock indices are in overvalued territory. From a macro perspective, the S&P 500 index, the representative U.S. stock index, has historically moved in line with nominal gross domestic product (GDP) over the long term. As of the end of 2024, the S&P 500 was analyzed to be overvalued by about 21% compared to nominal GDP. The U.S. Congressional Budget Office expects the potential growth rate of nominal GDP in 2025 to be 4.6%, and forecasts growth rates of 4.1% and 4.3% for 2026 and 2027, respectively. Based on these projections, the appropriate S&P 500 level over the next three years is estimated to be between 5,220 and 5,972. This suggests that the stock index will undergo a correction over the next three years as the overvaluation is resolved.

The value of the dollar has recently fallen sharply, and it is highly likely to decline further. The dollar index, which approached 110 in mid-January, fell below 100 by the end of April. Considering the factors that determine the dollar index, the dollar’s weakness is expected to continue in the medium to long term. First, the International Monetary Fund (IMF), in its World Economic Outlook in April this year, projected that the U.S. share of global GDP will fall from 26.4% in 2024 to 25.7% in 2030. Given that the U.S. share of GDP and the dollar index have historically moved in the same direction, this means the dollar index will decline over the next six years.

In addition, the expansion of the U.S. internal and external imbalances is another factor for the decline in the dollar index. The ratio of the U.S. net external debt to GDP surged from 16.7% in 2020 to 89.3% in 2024. During the same period, federal government debt also increased from 89.9% to 124.1% of GDP. Furthermore, the share of dollars in global central bank foreign exchange reserves fell from 71.1% in 2000 to 62.2% in 2010, and to 57.8% in 2024. Notably, China is selling U.S. Treasury bonds and buying gold. China’s holdings of U.S. Treasury bonds, which stood at $1.27 trillion at the end of 2013, decreased to $784.3 billion by the end of February 2025. If there is even a slight decrease in foreign direct investment or securities investment inflows into the U.S., the dollar index will fall. Buffett also said, "The United States is still the best place to invest, but the era when the dollar was the absolute safe asset is coming to an end."

During periods when the dollar index declines, emerging markets or the Korean stock index have outperformed the S&P 500. Recently, the won-dollar exchange rate fell below 1,400 won, returning to the level before the December 3, 12·3 Emergency Martial Law last year. If the dollar index continues to fall, the value of the won will rise further. It is advisable to increase the proportion of investments in emerging markets or domestic stocks rather than in the United States.

Kim Youngik, Adjunct Professor, Graduate School of Economics, Sogang University