What the Oracle of Omaha isn’t buying is just as important as knowing which stocks he’s selling.
There’s not a billionaire money manager on Wall Street who commands the attention of professional and retail investors quite like Warren Buffett. The reason is simple: he outperforms the broad-market S&P 500 (^GSPC 0.53%) by a substantial amount.
Since taking over as CEO of Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.15%) roughly 60 years ago, the Oracle of Omaha has delivered a return approaching 5,700,000% for his company’s Class A (BRK.A) shareholders. For the sake of comparison, the total return of the benchmark S&P 500, inclusive of dividends, is closer to 40,000% over the same timeline.
Though Buffett is fallible just like every other investor, he’s demonstrated a knack for locating amazing deals hiding in plain sight. He’s also an open book who regularly shares his thoughts on the stock market and U.S. economy during annual shareholder meetings and his yearly letter to Berkshire’s shareholders.
But even the Oracle of Omaha can make dubious history from time to time.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett passed on purchasing his favorite stock
Buffett’s “secret” to success is really is no secret at all. He’s a decisive long-term optimist who focuses on buying high-quality companies at an attractive valuation. The perception of getting a good deal is a must for Berkshire’s chief.
As of Jan. 17, the Oracle of Omaha was overseeing a 44-stock, $297 billion portfolio at Berkshire Hathaway. While there are plenty of stocks in this portfolio that Buffett has spoken highly of, there’s one company that’s especially near and dear to his heart — and you won’t find it listed in Berkshire Hathaway’s quarterly Form 13F filings with the Securities and Exchange Commission.
Despite Apple being Berkshire’s top investment holding, Buffett has spent considerably more money buying shares of his own company than any other stock.
Prior to July 2018, Warren Buffett was only allowed to buy shares of his company if they fell to or below 120% of book value, as of the most recent quarter. For as far as the eye can see prior to July 2018, Berkshire’s stock never dipped below this threshold, which meant not one dime was spent on buybacks.
On July 17, 2018, Berkshire Hathaway’s board amended the rules governing buybacks to allow its chief more liberty to repurchase shares. The updated criteria allow Buffett to buy Berkshire Hathaway stock with no ceiling or end date as long as the company has at least $30 billion in combined cash, cash equivalents, and U.S. Treasuries, and the Oracle of Omaha believes the shares are intrinsically cheap.
For 24 consecutive quarters (six full years) following this update, Warren Buffett repurchased shares of Berkshire Hathaway stock, with the cumulative total of these buybacks reaching almost $78 billion.
But dubious history was made during the September-ended quarter. For the first time since Berkshire’s buyback rules were amended, Buffett didn’t repurchase a single share of his company’s stock.
Cash isn’t the issue, with Berkshire ending September with an all-time record $325.2 billion in cash, cash equivalents, and U.S. Treasuries on its balance sheet.
Rather, valuation is the problem. Berkshire’s price-to-book value topped 170% during the third quarter for the first time since 2008. Being the ardent value investor he is, Buffett opted not to buy shares of his favorite stock.
This $166 billion warning to Wall Street is growing louder by the day
However, this isn’t the only warning to Wall Street that valuations are at a historic premium.
When Berkshire Hathaway files its operating results every quarter, the company’s cash flow statements detail how much Buffett and his top advisors, Todd Combs and Ted Weschler, spent buying and selling equities. In each of the last eight quarters, he and his team have been net sellers of stocks to the aggregate tune of $166.2 billion.
It’s possible there are benign catalysts behind this selling activity. With Buffett’s company sitting on sizable unrealized gains in Apple and Bank of America, and the peak marginal corporate income tax rate at its lowest point since 1939, ringing the register and locking in gains would appear to be a wise move. Buffett even alluded to the tax-advantaged selling of Apple stock during Berkshire’s annual shareholder meeting in May of last year.
But there’s likely a more ominous reason why one of Wall Street’s diehard optimists has been a persistent seller of stocks for two years: valuation.
Warren Buffett Indicator soared to an all-time high of 209% 🚨 For context, it peaked at 140% before the Dot Com Bubble Burst pic.twitter.com/bBiqziD0iG
— Barchart (@Barchart) December 9, 2024
In an interview with Fortune magazine 24 years ago, Buffett referred to what’s now known as the “Buffett Indicator” as “probably the best single measure of where valuations stand at any given moment.”
The Buffett Indicator divides the cumulative value of all public companies into U.S. gross domestic product. Whereas this ratio has averaged close to 85% (0.85) since 1970, it tipped the scales at an all-time high of 209% in December 2024.
Likewise, the S&P 500’s Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio), is trading at its third-highest level during a bull market rally when back-tested 154 years!
Since January 1871, there have only been six instances, including the present, where the S&P 500’s Shiller P/E topped 30 during a bull market. Following the prior five occurrences, the Dow Jones Industrial Average and/or S&P 500 eventually lost at least 20% of their value, if not more.
Warren Buffett’s actions paint a very clear picture that value is virtually nonexistent on Wall Street at present.
Image source: Getty Images.
The Oracle of Omaha’s long-term optimism is unwavering
Though Buffett’s short-term actions can sometimes confuse investors, there’s no questioning that the Oracle of Omaha is an unabashed optimist who often reminds investors not to bet against America.
Buffett, Combs, and Weschler are all well-aware that downturns are a natural part of the economic cycle. Since World War II ended in September 1945, the U.S. economy has navigated its way through a dozen recessions.
Rather than try to aimlessly time when these downturns will occur, Buffett and his team have angled Berkshire’s investment portfolio and dozens of owned assets to take advantage of lengthy periods of expansion. Whereas nine out of 12 recessions were resolved in less than 12 months, two economic expansions lasted beyond 10 years. The nonlinearity of the economic cycle makes being a long-term optimist a smart move.
These same principles apply to the stock market, as well.
It’s official. A new bull market is confirmed.
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.
Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
In June 2023, with the S&P 500 entering a new bull market, the researchers at Bespoke Investment Group published a data set on social media platform X that compared the calendar-day length of S&P 500 bull and bear markets dating back to the start of the Great Depression in September 1929. This covered a total of 27 separate bull and bear markets.
Bespoke found the average S&P 500 bear market stuck around for only 286 calendar days, or 9.5 months. In comparison, the typical S&P 500 bull market endured for 1,011 calendar days, or about two years and nine months. This is further validation that thinking long-term is a smart move.
Lastly, Warren Buffett has demonstrated a willingness, spanning multiple decades, to sit on his hands and wait for price dislocations in wonderful companies to fall into his proverbial lap. It worked wonders with Bank of America in 2011, and there will undoubtedly be similar opportunities to capitalize in the future.
Although Buffett’s rampant selling activity and unwillingness to repurchase shares of his own company point to potential trouble for Wall Street, the long-term outlook for equities remains as optimistic as ever.
