On Wall Street, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett often has the pedestal to himself.
Since taking over as CEO of Berkshire in the mid-1960s, he has seen a scorching hot total return on his company’s Class A shares (BRK.A) of more than 5,663,000%, as of the closing bell on December 4. If you run circles around the most followed indexes in the stock market, you tend to attract a lot of attention from the investing community.
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Another thing that endears professional and everyday investors to the Oracle of Omaha is his generally open-book approach. For about half a century, Buffett has freely expressed his opinions about the U.S. economy and stocks at annual shareholder meetings and in his annual letter to shareholders.
But investors will occasionally find that Buffett’s long-term optimism doesn’t always match his short-term trading.
Warren Buffett has represented a source of unapologetic optimism for the stock market for decades and has repeatedly warned investors not to bet against America.
While Buffett is not one to try to time the market with his trades, he is well aware that the US economy spends significantly more time growing than shrinking. He has used this simple numbers game to his advantage to grow Berkshire Hathaway’s business and investment portfolio over six decades.
However, over the past two years we have seen a markedly different investment approach than Warren Buffett and his top advisors Todd Combs and Ted Weschler. Specifically, Berkshire Hathaway’s consolidated cash flow statements show that Buffett’s company sold more shares than it bought for eight consecutive quarters (October 1, 2022 through September 30, 2024).
While there was minimal net sales activity in some quarters, stock sales are demonstrably up this year. Here’s a snapshot of quarterly net stock sales through 2024:
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Q1 2024: $17.281 billion in net stock sales
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Q2 2024: $75.536 billion in net stock sales
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Q3 2024: $34.592 billion in net stock sales
For those of you keeping score, this amounts to $127.41 billion in net stock sales through the first nine months of 2024 – and it’s an unmistakable warning to Wall Street and investors that trouble may be brewing for the stock market.
One of the Oracle of Omaha’s investing rules that he doesn’t bend much, if ever, is his desire to get a good deal. He has been a value investor throughout his tenure at Berkshire Hathaway and has demonstrated a willingness to sit on his hands until stock valuations make sense. Currently, the stock market is historically expensive.
One of the best valuation metrics that proves this point is the S&P500‘S (SNPINDEX: ^GSPC) Shiller price-to-earnings ratio (P/E), also known as the cyclically adjusted P/E ratio, or CAPE ratio. While the well-known price-to-earnings ratio divides a company’s stock price into its earnings over the past twelve months, the Shiller price-to-earnings ratio is based on average inflation-adjusted earnings over the past ten years. Taking into account a decade of earnings history minimizes the impact that shock events can have on traditional valuation tools such as the price-to-earnings ratio.
On December 4, the S&P 500’s Shiller P/E closed at 38.87, which is the highest closing value during the current bull market.
The key point is that this is only the third time since January 1871 that the S&P 500’s Shiller P/E has approached or exceeded 39. In other words, this is the third most expensive stock market going back more than 150 years.
In the past century, there have only been six instances where the Shiller P/E ratio has exceeded 30, including the current one. Each of the previous five events was ultimately followed by declines ranging from 20% to 89% in the stock market’s major indexes.
However, the Shiller P/E isn’t the only one warning that stocks are pricey. The so-called “Buffett Indicator” shot to a record high last week. This indicator, which Buffett championed in 2001, divides the cumulative market capitalization of publicly traded companies into U.S. gross domestic product (GDP).
Since 1970, the average for the Buffett Indicator has been around 85%. In other words, the total value of all stocks averages about 85% of the value of US GDP. In October 2024, the Buffett Indicator reached the 200% mark for the first time and closed at almost 208% on December 4.
While Warren Buffett hasn’t explicitly stated this, the writing is on the wall that stocks are pricey and value is virtually impossible to find. This explains why he sold shares overwhelmingly in 2024.
Admittedly, it must be a bit unnerving for investors to see the perpetually optimistic Warren Buffett sell more shares than he buys for eight consecutive quarters, and pick up this selling activity in a big way in 2024. But if you take a closer look at Buffett’s track record in investing, you’ll discover that he’s especially good at playing the waiting game.
Previously I pointed out the disparity between peaks and valleys in the economic cycle and how Berkshire’s chief uses this non-linearity to his advantage.
Since the end of World War II in September 1945, nine of 12 U.S. recessions have resolved in less than a year. Of the remaining three, none made it past 18 months. At the other end of the spectrum, most periods of economic growth in the past 79 years have exceeded 12 months, with two growth periods lasting more than ten years. Buffett and his team are well aware of this disparity, and he has deployed his investment portfolio and assets under his belt to take advantage of these long-winded expansions.
Just as the Oracle of Omaha plays this simple numbers game with the American economy, he has positioned Berkshire Hathaway to benefit from any price dislocations on Wall Street.
Arguably one of the best investments Warren Buffett ever made came shortly after the Great Recession. In August 2011, Buffett handed over $5 billion to… Bank of America to strengthen its balance. In return, Berkshire Hathaway received BofA preferred stock with an annual yield of 6%, as well as warrants to purchase up to 700 million shares of BofA common stock at an exercise price of $7.14 each. In mid-2017, Buffett exercised these warrants and made a small fortune.
After being a net seller of stocks for eight straight quarters, Berkshire Hathaway’s cash pile (which also includes cash equivalents and U.S. Treasuries) has grown to a record $325.2 billion. When the next shock happens and/or stock valuations start to make sense, it’s almost certain that Buffett will put his company’s coffers to work.
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions at Bank of America. The Motley Fool holds positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett’s Warning of $127 Billion to Wall Street by 2024 Speaks Volumes on the Current State of the Stock Market was originally published by The Motley Fool
