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Billionaire Warren Buffett is hinting at a market correction, but there is a silver lining

Investment legend Warren Buffett and his conglomerate, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B)haven’t given investors many reasons to take advantage of the strength of this market. Lately, Berkshire has largely been a net seller of stocks and has refrained from buying individual stocks or even buying back its own shares. In addition, the country has built up a wealth of cash and short-term government bonds that now exceeds $320 billion.

You might speculate that the holding company was stockpiling money in preparation for something big. But after the extra large sales of Apple (NASDAQ: AAPL) And Bank of America (NYSE: BAC) shares in the third quarter, a logical conclusion is that Buffett expects a market correction. That’s not exactly the kind of news investors were hoping for, but it does have a positive edge.

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By definition, a market correction occurs when a large broad index such as the S&P500 retreating 10% to 20% from its recent high. Most corrections are eventually followed by recoveries that send these indices back to new market highs, but for investors, such significant declines in their portfolios can be stressful.

Billionaire investor David Einhorn, who runs the hedge fund Greenlight Capital, has pointed out that while Buffett prides himself on being a long-term investor, he has also historically been good at timing market corrections.

  • Buffett closed his first fund – the Buffett Partnership – in 1969 after becoming concerned about accounting malfeasance at a growing number of companies in the market.

  • Buffett then bought shares after the market bottomed out in the early 1970s following an oil crisis in 1973-1974. In 1974, Buffett bought 11% of the outstanding shares in the Washington Post.

  • In 1986, Buffett abstained from the “euphoria” on Wall Street and fled into bonds just before a broad market downturn and the Black Monday of 1987.

  • Buffett and Berkshire didn’t run into trouble during the Great Recession. Instead, they took advantage and injected billions of dollars of capital into Bank of America Goldman Sachs in deals that ultimately generated phenomenal returns.

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Part of Buffett’s success lies in his ability to avoid becoming overexposed during stock market downturns. Now Buffett and Berkshire Hathaway appear to be signaling once again that the market is overheated. This doesn’t mean the market will crash tomorrow, but Buffett likely believes a shift in sentiment is coming.

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