Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett is easily one of the greatest investors of our time. In 65 years, he's grown his net worth from $10,000 to more than $89 billion, all while creating more than $400 billion in value for Berkshire Hathaway's shareholders over a more than five-decade stretch.
Given Buffett's stock-picking prowess, he's also someone that Wall Street and retail investors look to for guidance as to where the broader market and certain core sectors/industries may be headed next. Berkshire's quarterly 13F filings with the Securities and Exchange Commission provide that intimate look under the hood, so to speak, and allows us inside access to what the greatest mind on Wall Street has been up to in recent months.
On Valentine's Day, Feb. 14, Berkshire Hathaway filed its latest 13F for the fourth quarter. Unfortunately for investors, there was little to love.
If there was any question as to whether Buffett still views equities as overvalued -- he referred to the valuations of businesses "possessing decent long-term prospects" as "sky-high" in Berkshire's 2019 annual shareholder letter -- the latest 13F absolutely confirmed it.
Buffett remains a net seller of equities
The most telltale sign that Warren Buffett is no fan of stocks at the moment can be seen when comparing the amount of stock sold to what was purchased during the fourth quarter. Although Berkshire added or bought into eight equities and reduced its position in an equal number of companies, there was a huge disparity on the sell side of the equation compared to the buy side.
Although we don't know the exact price Buffett bought and sold these companies, I utilized their closing values on Dec. 31 to estimate how much capital was put to work versus how much was freed up via selling.
On the buy side, Berkshire Hathaway purchased around $1.58 billion worth of stock. The newly added supermarket giant Kroger accounted for the largest portion of this ($549.1 million), with Occidental Petroleum trailing fairly closely behind ($472.5 million).
Comparatively, Buffett and his team sold approximately $7 billion worth of stock during the fourth quarter, or more than four times the amount of stock that was purchased. In fact, the five largest sells -- Wells Fargo (NYSE:WFC), Goldman Sachs, Apple, Travelers Cos., and Phillips 66 -- equaled a higher dollar value than the biggest buy (Kroger) Buffett made in Q4.
As further evidence, we've witnessed Berkshire Hathaway's cash pile grow to an all-time record of $128.2 billion in the third quarter of 2019. It's been four years since Buffett has made a needle-moving acquisition, and this combination of the company's rising cash hoard and its net-seller position in Q4 firmly suggests that Buffett is no fan of equities right now.
He pared down core cyclical businesses
However, this isn't the only evidence we have that Buffett is hesitant to put his capital to work. What's particularly notable about the latest 13F filing is what stocks were sold. Here's the rundown of the eight stocks that were pared down, along with the number of shares sold:
- Wells Fargo: 55,156,000 shares sold
- Goldman Sachs: 6,348,884
- Travelers Cos.: 5,646.012
- Phillips 66: 4,955,201
- Apple: 3,683,113
- Bank of America (NYSE:BAC): 2,240,000
- American Airlines Group (NASDAQ:AAL): 1,200,000
- Bank of NY Mellon: 1,172,193
Some of these reductions are probably benign, such as the disposition of 2.24 million Bank of America shares and 1.2 million American Airlines shares. Buffett has regularly opined that he prefers to keep his investment stakes under 10% of a company's outstanding shares, and both Bank of America and American Airlines have been regularly buying back their own stock (thereby reducing their outstanding share count). In particular, the bulk of Bank of America's $37 billion capital return program over the next year is based on share buybacks.
What really stands out, though, is Buffett's move away from cyclical names that rely on a strong economy to thrive. The continued paring down of money-center bank Wells Fargo and the big sale of more than 5.6 million shares of insurance giant Travelers speak volumes. In other words, not only is Buffett worried about sky-high valuations, but his confidence in U.S. and/or global growth appears to be waning.
Critical of diversification, Buffett bought into ETFs
One final bit of evidence that reinforces the idea that Buffett views stocks as grossly overvalued comes from the buy-side of the equation in the fourth quarter. Though they accounted for Berkshire's two smallest additions, Buffett (or perhaps some member of his team) purchased $12.7 million worth of the SPDR S&P 500 ETF Trust and $12.7 million worth of the Vanguard S&P 500 ETF.
Why's this meaningful, you ask? Well, one of Buffett's most famous quotes has to do with diversification. Said Buffett, "Diversification is protection against ignorance. It makes very little sense for those who know what they're doing."
While there's no question that Buffett knows exactly what he's doing on the investment front, the purchase of two index funds that almost perfectly mirror the S&P 500 goes against everything Buffett has traditionally done on the investment front. Though he is a fan of index funds for everyday investors, this isn't a move we've seen before from an investor who traditionally focuses on only a few sectors of the market.
I believe it's crystal clear at this point that Buffett is leery of existing stock valuations -- and that's saying something for one of the most successful buy-and-hold investors of our generation.