Over the past two years, Warren Buffett has been sending Wall Street a message loud and clear – without saying a word. His approach is more cautious than ever, and Berkshire Hathaway’s eye-catching $325 billion cash pile is the result of his latest strategy.
Although investors have long been following Buffett’s moves, his latest decisions have raised eyebrows. This caution speaks volumes for a man known for his optimism about the American economy.
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Over the past eight quarters, Berkshire Hathaway has been a net seller of stocks, raking in $166 billion by selling off massive amounts of stocks, including old favorites like Apple and Bank of America.
The scale of these sales is unprecedented, as it marks the first time since 2018 that Buffett has not repurchased shares of Berkshire – a move that has not gone unnoticed in the financial community. This view indicates one thing: Buffett views the market as significantly overvalued.
Much of this money is not reinvested in the stock market, but parked in short-term US government bonds. Thanks to high returns, these low-risk investments have netted Berkshire nearly $10 billion.
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Cathy Seifert, an analyst at CFRA, recently pointed out that Buffett’s downsizing of Apple holdings is a wise move, especially as Apple has grown to become a large part of Berkshire’s portfolio. However, this shift towards government bonds instead of stocks indicates that Buffett sees limited bargains on Wall Street – a view that is in line with his famous ‘buy low’ philosophy.
Still, some analysts believe Buffett’s caution could be a missed opportunity. Cash yields could fall if the Federal Reserve starts cutting interest rates, making stocks more attractive. In that case, Berkshire’s heavy cash position could mean missed profits when the market recovers.
However, Buffett has historically banked on patience, using recessions to scoop up undervalued assets. He believes that a significant cash reserve gives Berkshire the flexibility to make bargains when the market slumps.
The cyclically adjusted price-to-earnings ratio (CAPE), also known as the Shiller P/E ratio, paints a clearer picture of the current state of the market. At above 36 – more than double the long-term average – this ratio indicates a market well above traditional valuations.
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Historically, CAPE ratios above 30 have often preceded significant market declines, losing anywhere from 20% to nearly 90% of their value. To the seasoned investor, these numbers may seem like a harbinger of turbulent times ahead.
In addition to valuations, other economic indicators also support Buffett’s cautious attitude. The yield curve on U.S. Treasury bonds has remained inverted for a historic period, signaling potential problems. Combined with a notable decline in the M2 money supply – the first of its kind since the Great Depression – the data points to a possible downturn.
But if there’s one thing Buffett has proven throughout his career, it’s that patience pays off. He jumped into the famed Bank of America in 2011, buying $5 billion worth of preferred stock at a time when the bank was struggling. He recently sold $896 million worth of stock.
Buffett’s moves may be unsettling to those accustomed to his optimism, but they are not without precedent. With its significant cash supply, Berkshire Hathaway is ready to pounce when the market offers better deals.
Buffett’s track record shows that he is no stranger to capitalizing on “price dislocations,” as he calls them. For the Oracle of Omaha, waiting for high ratings is part of the plan.
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This article of Warren Buffett’s $166 billion warning to Wall Street has reached a fever pitch and the financial world cannot afford to ignore it. Originally appeared on Benzinga.com
