Buffet has the highest cash balances of all time; should I sell everything?

A family member texted me after seeing headlines following Warren Buffett's annual letter to Berkshire Hathaway's shareholders (read the full letter here). A smattering of headlines read:  "Warren Buffett amasses more cash and sells more stock" and "Why Warren Buffett's cash pile is growing, and what it means for markets."

In other words, "Is it time to get out of the market?"

People pay attention when the "Oracle of Omaha" speaks and with good reason. But, if you stopped at the headlines, you may have gotten the wrong message.

Here's a more extended excerpt from the letter:

Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won't change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.

Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.

Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country's short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.

Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country's citizenry. So, too, with personal skills. Lacking such assets as athletic excellence, a wonderful voice, medical or legal skills or, for that matter, any special talents, I have had to rely on equities throughout my life. In effect, I have depended on the success of American businesses and I will continue to do so.

There's a lot of wisdom in these paragraphs for household investors, too. Yes, we need to maintain cash or bond balances to withstand shocks, fund near-term liquidity needs, and take advantage of future opportunities. But beyond those reasons, most of our household savings should remain invested in equities for the long run, even in retirement.

The level of economic and political anxiety in our country is understandable. I feel it, too. But let's also not lose sight of the risks of not being invested, especially with the threat of inflation, as Buffet points out. Moreover, trying to time the market is a fool's errand: you must be right two times (when to sell and buy back in).

Market volatility, while unsettling, is a normal part of the investment journey and the price we pay for superior long-term returns. There will be future shocks where stocks will decline 30% or more. I cannot say when the next one will be, but it seems to occur roughly once a decade. For this reason, a portfolio of 100% stocks is rarely appropriate for a retiree or anyone who needs to access a portion of their savings in the near term.

As Morgan Housel, author of The Psychology of Money, points out, the most significant and overlooked key to Buffett's investing success has been the sheer amount of time he's been doing it, allowing his returns to compound year after year. As his late business partner said, "The first rule of compounding is to never interrupt it unnecessarily."

I don't have a crystal ball, and neither does Buffett. Therefore, the strategy most likely to produce the best results over time remains: don't risk money you cannot afford to lose in the short run and keep the rest invested for the long run.