Among Wall Street’s billionaire money managers, few, if any, attract as much attention as Berkshire Hathaway‘S (NYSE: BRK.A)(NYSE: BRK.B) Warren Buffett – and it’s not hard to see why. Since becoming CEO of Berkshire in the mid-1960s, he has guided his company’s Class A stock (BRK.A) to a total return of nearly 5,500,000% and the stock’s total annualized return, including dividends, to nearly doubled. S&P500 (SNPINDEX: ^GSPC).
Investors look to the Oracle of Omaha for nuggets of wisdom about the U.S. economy, general investment philosophy, and stocks to buy. Form 13F filings with the Securities and Exchange Commission have allowed investors to track and even mirror Warren Buffett’s trading activities for decades.
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However, this documented trading activity of late seems to be a harbinger of trouble in the stock market.
Based on what Form 13Fs, Form 4s and Berkshire Hathaway’s third-quarter report tell us, Warren Buffett and his investment assistants, Todd Combs and Ted Weschler, oversee a roughly $285 billion portfolio at Berkshire Hathaway that includes more than three dozen securities. . Berkshire’s top investment holdings include technology stocks Applecredit service provider American Expressand money center giant Bank of America.
While there have been a select few stocks that the Oracle of Omaha has spent billions of dollars on purchases of late, such as property and casualty insurers Chubb and integrated oil and gas resources Western petroleumThere’s one stock that Buffett has spent significantly more of his company’s cash purchases on than any other stock… and it’s not even close.
Warren Buffett’s favorite stock to buy, which isn’t found in Berkshire Hathaway’s 13Fs, is (drum roll) shares of his own company.
Before July 2018, Berkshire’s chief was only allowed to buy back shares if his company’s stock fell to or below 120% of book value. Unfortunately, Berkshire stock never reached this line-in-the-sand threshold, meaning not a cent was spent on buybacks.
On July 17, 2018, Berkshire Hathaway’s board changed its buyback rules to give Warren Buffett the opportunity to reward his company’s shareholders. The board has not set a ceiling or end date for Berkshire’s buyback program, as long as the company has at least $30 billion in combined cash, cash equivalents and U.S. Treasuries on its balance sheet, and Buffett views his company’s stock as intrinsically cheap.
During the quarter ended in June, Buffett oversaw $345 million worth of stock buybacks, bringing the cumulative amount spent on buybacks since July 2018 to nearly $78 billion.
But something interesting happened in the quarter ending September. For the first time in 25 quarters (since July 1, 2018), not a cent has been spent on buying back Berkshire Hathaway stock.
To be fair, this wasn’t the only eyebrow-raising finding in Berkshire’s third-quarter report. Based on the company’s cash flow statement, $34.59 billion more shares were sold than they were bought in the quarter ended September. This marks the eighth straight quarter that Warren Buffett and his team have sold more shares than they bought, with the total of these net sales now exceeding $166 billion.
As Buffett freezes stock buybacks, at least for a quarter, and continues to trim his company’s $285 billion portfolio, the conclusion couldn’t be clearer: Stocks are pricey and value is virtually nonexistent.
The Oracle of Omaha’s favorite valuation metric, which is the Wilshire 5000 Index in US gross domestic product (GDP) has reached the highest value in history, looking back over half a century. This ‘Buffett Indicator’ peaked at almost 140% during the dotcom bubble, reached 193% before the 2022 bear market, and is currently approaching 200% of GDP.
It’s a similar story when we look at the S&P 500’s Shiller price-to-earnings (P/E) ratio, also called the cyclically adjusted P/E ratio or CAPE ratio. The Shiller P/E is based on average inflation-adjusted earnings over the past ten years.
The S&P 500’s Shiller P/E closed at 36.46 on November 1, which is more than double the average of 17.17, after backtesting to January 1871. With the exception of the Internet bubble, where it peaked above 44, and In the first week of 2022, where the price briefly rose above 40, we have never witnessed a higher valuation multiple assigned to shares.
The same goes for Berkshire Hathaway shares, which were at a 60 to 70% premium to book value for much of the third quarter. It’s been 16 years since Berkshire’s stock has regularly been this pricey relative to book value.
With Berkshire’s cash hoard reaching an all-time high of $325.2 billion, the message is loud and clear that stocks are pricey and that these valuations are likely unsustainable in the long term.
But there is a silver lining in Warren Buffett’s historic selloff. History shows that the Oracle of Omaha’s willingness to be patient and maintain his long-term perspective has paid handsome dividends for Berkshire Hathaway and the company’s loyal shareholders.
Buffett has always been a stickler for keeping things simple and betting when the odds are in his favor. While we can’t predict when stock market corrections will occur, how long they will last, or how steep the eventual decline will be, what we do know is that economic downturns, like stock market corrections, have historically been short-lived are.
The reason Buffett has warned investors on a number of occasions not to bet against America is that most recessions are resolved in less than a year. By comparison, there have been two periods of growth for the U.S. economy since the end of World War II that lasted at least a decade. By betting that the US economy will grow over time, the Oracle of Omaha has undeniably become richer.
The same can be said about Wall Street. In June 2023, researchers at Bespoke Investment Group published a data set comparing the average calendar day length of 27 separate bear and bull markets in the benchmark S&P 500 since the start of the Great Depression in September 1929. While the average bear market lasted only 286 calendar days (about 9.5 months), the typical bull market lasted 1,011 calendar days, or 3.5 times as long.
Even though Warren Buffett is struggling to find value in an expensive market, that doesn’t mean he would bet against America. He remains an unapologetic long-term optimist, and it’s only a matter of time before some of Berkshire’s $325.2 billion coffers are put to work.
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Bank of America and American Express are advertising partners of The Ascent, a Motley Fool company. Sean Williams has positions at Bank of America. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett didn’t buy shares of his favorite stocks for the first time in 25 quarters, which is telling (and worrying) for Wall Street. originally published by The Motley Fool
