This once-silent warning has become deafening over the last nine quarters.
Few Wall Street money managers garner the attention of professional and everyday investors quite like Berkshire Hathaway‘s (BRK.A 0.34%) (BRK.B 0.28%) billionaire CEO Warren Buffett.
The aptly dubbed “Oracle of Omaha” has overseen a jaw-dropping return in his company’s Class A shares (BRK.A) of more than 5,800,000% over the last six decades, as of the closing bell on Feb. 21. When you run circles around the benchmark S&P 500 (^GSPC -0.47%), which has returned closer to 40,000%, including dividends, over the same time frame, you’re bound to earn a following.
In addition to riding Buffett’s coattails to significant long-term gains, investors have also come to appreciate Buffett’s open-book approach. His annual letter to shareholders and yearly meeting in Omaha provides a forum for Berkshire’s chief to speak candidly about the U.S. economy, the stock market, and the characteristics he looks for in great businesses.
The problem is that Warren Buffett’s long-term vision doesn’t always align with his short-term actions.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett’s once-silent warning to Wall Street is now deafeningly loud
To be abundantly clear, the Oracle of Omaha is a long-term optimist. He’s reminded investors on quite a few occasions not to bet against America. This is because Buffett and his team of advisors, Todd Combs and Ted Weschler, wisely understand that economic and stock market cycles aren’t linear, and both the U.S. economy and stock market spend a disproportionate amount of time expanding/rising.
But just because Buffett is a long-term stock market bull who won’t bet against America, it doesn’t mean he’s always going to be a buyer of equities.
Arguably the most-telling data point that can clue investors into how Buffett really feels about Wall Street and the stock market is Berkshire Hathaway’s cash flow statements. Specifically, comparing Berkshire’s “purchases of equity securities” and “sales of equity securities” can help decipher whether Buffett is net buyer or seller of stocks.
During the fourth quarter of 2022 (Oct. 1, 2022 – Dec. 31, 2022), Berkshire’s chief oversaw more than $14.6 billion in net-equity sales. Based on Berkshire’s 2024 fourth-quarter and annual report, this net-selling of stocks has continued for a ninth straight quarter:
- Q4 2022: $14.64 billion in net-equity sales
- Q1 2023: $10.41 billion
- Q2 2023: $7.981 billion
- Q3 2023: $5.253 billion
- Q4 2023: $0.525 billion
- Q1 2024: $17.281 billion
- Q2 2024: $75.536 billion
- Q3 2024: $34.592 billion
- Q4 2024: $6.713 billion
Collectively, Warren Buffett has sold $172.93 billion more in stock than has been purchased since Oct. 1, 2022. This figure includes a staggering $134.1 billion in net-selling activity last year.
This once-silent warning from Berkshire’s chief can no longer be ignored.
The Oracle of Omaha is a diehard value investor — and value is tough to come by
The obvious question to ask is: Why is one of Wall Street’s most unwavering long-term optimists continuing to raise cash — Berkshire’s cash, cash equivalents, and U.S. Treasuries reached a record $334.2 billion at the end of 2024 — by selling stocks every quarter?
During Berkshire Hathaway’s annual shareholder meeting in May 2024, Buffett intimated that higher peak marginal corporate income tax rates were coming, which meant locking in unrealized gains at an advantageously low rate would, in hindsight, be viewed as a genius move. This was his justification when explaining notable selling activity in Berkshire’s top holding, Apple (AAPL -0.02%).
While ringing the register for tax purposes might be part of the reasoning behind this 27-month net-selling spree, a more logical explanation is that Warren Buffett is a diehard value investor, and there’s simply not much in the way of value to be found on Wall Street at the moment.
On one hand, many of Berkshire’s existing holdings aren’t the bargains they once were. The aforementioned Apple, which had a low-to-mid teens price-to-earnings (P/E) ratio when Buffett was initially buying in early 2016, now sports a trailing-12-month P/E ratio of almost 39.
Likewise, Berkshire’s No. 3 holding, Bank of America (BAC -1.17%), was valued at a 62% discount to its book value when the Oracle of Omaha scooped up $5 billion worth of BofA preferred stock in August 2011. Today, Bank of America trades at a 25% premium to its book value.
But the bigger issue just might be that there isn’t much in the way of value to be found in the universe of stocks not currently held by Berkshire Hathaway.
S&P 500 Shiller CAPE Ratio data by YCharts.
Recently, the S&P 500’s Shiller P/E Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio), hit rarified territory. The Shiller P/E is based on average inflation-adjusted earnings from the previous 10 years, which means its readings don’t get flummoxed by short-lived shock events and recessions like the traditional P/E ratio can.
When the closing bell rang on Feb. 21, the S&P 500’s Shiller P/E stood at 37.90, which is well over double its average reading of 17.21 when back-tested 154 years. It’s also the third-highest reading during a continuous bull market since January 1871.
The Shiller P/E has only topped 30 six times, including the present, in those 154 years. Following the prior five occurrences, the S&P 500 eventually lost 20% or more of its value.
In short, Buffett’s ongoing selling looks to be a clear warning to Wall Street that premium valuations aren’t sustainable.
Image source: Getty Images.
Buffett has historically thrived by being patient
On the surface, witnessing Warren Buffett continue to sell more stocks than he’s purchased for over two years has to be a bit unnerving. But this is a scenario Berkshire’s chief has successfully navigated before.
As noted, Buffett is an unabashed value investor who’s unwilling to chase even wonderful companies higher if their valuation doesn’t make sense. But he’s also an investor who’s shown an incredible willingness to deploy his company’s capital when price dislocations occur.
One of the best examples of this is the aforementioned $5 billion worth of Bank of America preferred stock Berkshire acquired in August 2011. While BofA wasn’t exactly desperate for a cash infusion, Buffett offered this capital to shore up the balance sheet of a then-struggling BofA in the wake of the financial crisis.
In addition to earning a 6% yield on this preferred stock investment, Buffett’s company received warrants to purchase up to 700 million shares of Bank of America common stock with an exercise price of $7.14 per share. Buffett exercised these warrants in mid-2017 and instantly made billions in (unrealized) profit.
Following two years and three months of net-equity sales, Berkshire Hathaway is sitting on a treasure chest worth $334.2 billion. Although a minimum of $30 billion in combined cash, cash equivalents, and U.S. Treasuries is needed to execute share repurchases, this affords Buffett around $300 billion to put to work as he sees fit.
Being patient and allowing wonderful companies to fall to reasonable valuations has been a time-tested strategy that’s helped make Berkshire’s chief and his company’s shareholders notably richer over time.
