The capital markets have gotten off to a red-hot start in 2024. The Nasdaq Composite index is up nearly 4% so far this year, while the S&P 500 has gained closer to 5% as of market close on April 17.
While a small cohort of megacap-technology companies collectively known as the "Magnificent Seven" have played a big role in the market's upward movements, the excitement surrounding artificial intelligence has spread to small and mid-cap technology enterprises as well. Moreover, some companies in the pharmaceutical industry have been witnessing increased buying activity thanks to breakthroughs in obesity care and diabetes medications.
The broad theme is that different sectors and catalysts are actively fueling the S&P 500 to near record levels. Surely, investors must be wondering if now is the opportune moment to get in on the action.
One way to facilitate investing decisions is to study the moves of reputable investors. When it comes to closely tracked money managers, Berkshire Hathaway (BRK.A 0.45%) (BRK.B 0.54%) CEO Warren Buffett takes the cake.
Let's dive into Buffett's recent moves in the market and how they can help shape your own investment strategy.
Remember to think big
A common mistake that beginner investors make is spending an inordinate amount of time trying to find the next big opportunity. While looking for a needle in a haystack can be entertaining, it's often not necessary when it comes to wealth creation.
From 1964 to 2023, Berkshire Hathaway returned 4,384,748%. Looked at another way, the fund's compounded annual gain of 19.8% is nearly double that of the S&P 500.
While these returns are impressive, believe it or not Buffett employed a relatively straightforward investment style.
Berkshire's top-five largest positions are Apple, Bank of America, American Express, Coca-Cola, and Chevron.
There are a couple of themes to explore from the stocks above. First, all of them are blue chip companies that are some of the most recognizable brands in their respective industries. Additionally, all of these businesses generate consistent, robust cash flow. Subsequently, these excess profits are used for dividends and share buybacks -- both of which are rewarding for shareholders.
You see? Buffett isn't investing in small, speculative opportunities that might pay off big in the future. Rather, he buys larger, more established businesses and doubles down on his winners over a long-term horizon.
Image source: The Motley Fool.
What's Buffett been up to?
The ideas above underline an important aspect of Buffett's investment philosophy. Buffett is not a trader; he's a long-term investor who rarely makes dramatic moves from quarter to quarter.
According to Berkshire's latest 13F filing, some of the bigger moves Buffett made recently were trimming his position in Apple by about 10 million shares while adding roughly 30 million shares to his position in satellite radio company SiriusXM. It's important to note that Apple still remains Buffett's largest position, accounting for approximately 50% of his total portfolio.
The more curious move (or perhaps lack thereof) is Buffett's growing cash pile. At the end of 2023, Berkshire held $168 billion of cash and marketable securities on its balance sheet.
Is now a good time to invest in the market?
On one hand, it may be tempting to investors to participate in the momentum fueling the S&P to record highs. By contrast, seeing Buffett sitting on the sidelines could be a sign that he views current market dynamics differently. Remember, Buffett is a contrarian investor.
Given how much activity is fueling the markets right now, it may seem surprising to see Buffett hoarding so much cash.
But my thinking is that Buffett is waiting for more concrete moves from the Federal Reserve as it combats the impacts of lingering inflation and a high interest rate environment.
Another way of saying this is the market will always react to whatever the Fed decides to do. But Buffett, having perfected the art of patience, won't chase fleeting opportunities driven by market momentum.
For investors looking for some exposure to high-growth areas such as artificial intelligence (AI), but who are also seeking diversification, the Vanguard Growth ETF could be for you. This exchange-traded fund (ETF) provides exposure to many of the largest tech enterprises in the world. It also complements these positions with emerging opportunities in healthcare and other sectors.
Additionally, I'd encourage investors to look for reliable dividend payers to supplement some passive income for your portfolio. A good source of consistent dividend income can be found in business development companies (BDCs), which are required to pay out at least 90% of taxable income each year to shareholders.
Keeping some cash on hand, like Buffett does, is a prudent strategy. However, the key theme here is that there is never a perfect moment to begin investing. Passive vehicles such as index funds provide a high degree of diversification, thereby mitigating some of the risks associated with owning individual stocks.
The idea of trying to time the market parallels my point above about looking for the next big opportunity to break out. It is much more important to simply get started investing, rather than trying to identify the perfect moment.
