There's no question that Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.81%) CEO Warren Buffett has earned his place among the greatest investors of all time. Over the past 65 years, the Oracle of Omaha, as he's come to be known, has grown his net worth from about $10,000 to north of $88 billion. Mind you, this figure doesn't include the tens of billions he's generously donated to charity over the years.
Buffett has also helped create more than $400 billion in value for his shareholders. Berkshire Hathaway has acquired more than five dozen companies with Buffett at the helm, and it currently sports an investment portfolio of 48 securities that's worth $247 billion as of this past weekend.
Buffett's investment strategy has proved simple, yet effective. He looks for time-tested and trusted businesses that offer competitive advantages, then buys them and holds on for very long periods of time. You could certainly say that his optimistic views on the U.S. and global economy have only furthered this buy-and-hold philosophy.
However, Warren Buffett has recently been sending mixed signals about the stock market, and it has investors rightly concerned.
The Oracle of Omaha is leery about putting his cash hoard to work
Berkshire Hathaway's cash pile hit an all-time record of $128.2 billion at the end of the third quarter. With Buffett not having pulled the trigger on a major acquisition since the Precision Castparts buyout four years ago, Berkshire's cash pile has been left to grow.
Why isn't Buffett spending his cash? He laid out that thesis in the company's 2019 annual letter to shareholders:
In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
This is a fancy way of saying that Buffett does plan to utilize this capital for investment purposes, or may consider pulling the trigger on acquisitions, but prices simply aren't right at the moment. Buffett rarely criticizes the U.S. economy or valuations, but to see him write that "prices are sky-high for business possessing decent long-term prospects" suggests that he's about as negative as he could possibly get on the greatest wealth creator on this planet, the stock market.
Additionally, Buffett hasn't elected to repurchase much of Berkshire Hathaway's stock of late and has been a net seller of stocks, according to the most recent 13F filing with the Securities and Exchange Commission (SEC).
Buffett has positioned Berkshire Hathaway to take advantage of cyclical growth
Here's where things get interesting. Although it's abundantly clear that Buffett is concerned about valuations, he's also shifted the make-up of Berkshire Hathaway's investment portfolio to take advantage of a growing U.S. and global economy. In other words, despite prices being "sky-high" for high-quality businesses, he's been steadily shifting Berkshire's exposure to cyclical businesses.
For example, between the third quarter of 2011 and Q3 2019, the percentage of invested capital tied up in financials, Buffett's bread-and-butter sector, grew from 32% to 46%. In fact, the 47.37% of invested assets allocated to financials in Q2 2019 was the highest percentage we'd seen devoted to this sector since Q3 2006!
Bank of America (BAC 1.54%), for instance, has grown into Berkshire's second-largest holding, with its 947.8 million shares translating into $31.1 billion in market value. Bank of America has put its litigation expenses from the early part of the 2010s firmly in the rearview mirror, and it has benefited from lower noninterest expenses and a bounce off of historically low lending rates. Berkshire holdings such as BofA, JPMorgan Chase, and US Bancorp, all of which have been added to in recent years, represent a bet on continued economic growth.
Warren Buffett has also piled into tech through its holdings in Apple (AAPL 0.68%). Since 2016, Berkshire has built up a nearly 249 million share stake in Apple, worth a healthy $77 billion as of this past weekend. While Apple does have a $207 billion cash hoard of its own and is becoming more reliant on services and wearables, it's still, predominantly, a cyclical business thanks to its primary sales driver, the iPhone.
Buffett currently has around three-quarters of his invested capital tied up in the highly cyclical financial and information technology sectors.
Next week's 13F filing may offer more clues
So, which is it? Is Buffett worried about high valuations, or is he gung-ho on the economy and positioning Berkshire to take advantage of this record-long expansion cycle?
Perhaps the answer lies somewhere in between. Buffett might have a nearly unrivaled investment track record, but he's also human and proved fallible in the past. Maybe he's just as uncertain about the intermediate future for the stock market and U.S. economy as the rest of us.
What we do know is that the upcoming release of 13F filings with the SEC next week may offer more clues as to what the Oracle of Omaha thinks about the stock market and the U.S. economy. If Buffett chooses to continue adding to existing positions in financials or information technology, it would demonstrate that, in his view, the economy remains strong. Comparatively, if Buffett remains a net seller of stocks, it would reinforce the idea that equities are pricey and that he's in no rush to deploy his cash.
Investors badly want direction from Warren Buffett, but there aren't any guarantees they'll receive it when the hood is lifted on Berkshire Hathaway's holdings late next week.