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Warren Buffett Expects to Add at Least $11 Billion to This Investment in the Second Quarter

Warren Buffett knows it only takes a few smart investments to produce massive market-beating returns.

He told shareholders that in the 58 years or so that he’s been managing Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.93%), there have only been a half-dozen to a dozen decisions that have made an impact on its success as a business. The real secret: “We only swing at pitches we like,” he said, a baseball metaphor he has used for over 25 years.

Recently, there haven’t been a lot of pitches in Buffett’s sweet spot: Berkshire’s stock sales have exceeded its purchases in each of the last six quarters. But there’s one big holding that Buffett expects to keep adding to in the second quarter, and investors can’t ignore it.

Another $11 billion going toward Berkshire’s largest holding

Most investors know that Apple (NASDAQ: AAPL) remains Berkshire’s largest equity holding. Despite the sell-off of a portion of its stake in the company over the last two quarters for tax purposes, it remains Buffett’s biggest bet in the stock market. The Oracle of Omaha expects that to remain the case for the foreseeable future.

But far exceeding the value of its stake in Apple is Berkshire’s cash and cash equivalents position. That position reached $189 billion by the end of the first quarter. And Berkshire invests the vast majority of that cash in short-term U.S. Treasury bills.

Short-term U.S. Treasuries are Buffett’s preferred place to park cash because they offer safety and liquidity. In today’s market, he gets those two benefits and a nice interest rate to boot. The three-month Treasury yield sits around 5.4% as of this writing.

As such, Buffett is totally fine stockpiling cash and investing it into Treasuries. “It’s a fair assumption that they’ll probably be at about $200 billion at the end of the quarter,” Buffett said of Berkshire’s Treasury holdings. He said he would still have a big pile of cash even if yields were much lower (but don’t tell the Federal Reserve).

“We’d love to spend it,” he told shareholders. “But we won’t spend it unless we think we’re doing something that has very little risk and could make us a lot of money.”

Those opportunities are few and far between. As Buffett notes, he has only really made a handful of big decisions to alter the course of Berkshire during his 58-year tenure. And as Berkshire gets bigger, the opportunities shrink because “a lot of money” now means tens of billions of dollars instead of tens of millions. There are only so many investment opportunities that can move the needle at this point.

Should investors follow Buffett’s lead?

Buffett’s recent spell of stock sales and growing cash pile might give many investors the message that they should be accumulating cash as well. And with interest rates where they are, cash isn’t a complete drag on returns like it has been in the past. Still, I don’t think Buffett would recommend most investors manage their portfolio like he manages Berkshire’s.

He thinks individual investors have a big advantage over big institutional investors, even Berkshire Hathaway. Referring to his late partner, Charlie Munger, he said: “Ten million, I think Charlie or I could earn high returns on because I think there’s just a few things that happen on a very small scale.” Considering most individual investors are managing much less than $10 million, that means there are still opportunities to outperform the overall market.

The ability for individual investors to move in and out of small stocks without significantly impacting the market price is a big advantage. Indeed, small-cap stocks are currently undervalued relative to their historic levels, while large-cap stocks are overvalued, and megacap stocks might be even more overvalued.

The small-cap segment of the market could present unique investment opportunities for individuals, but it’s not a field Berkshire Hathaway can play in.

Even for investors who prefer the stability of large-cap stocks, taking Buffett’s top recommendation and investing in an S&P 500 index fund isn’t a bad idea right now either.

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