This past Saturday, May 6, Berkshire Hathaway (BRK.A 0.20%)(BRK.B 0.20%) CEO Warren Buffett, right-hand man (and Executive Vice Chairman) Charlie Munger, and the rest of Berkshire's leadership unveiled their company's first-quarter operating results and offered nuggets of investing wisdom in front of a crowd of around 40,000 people at the company's annual shareholder meeting in Omaha, Nebraska.
You don't have to dig too deep to find out why investors flock to Omaha annually to hear Warren Buffett speak about the U.S. economy, various innovations and trends, and the stock market. Since becoming CEO of Berkshire Hathaway in 1965, he's led his company's Class A shares (BRK.A) to an aggregate return of 3,787,464%, as of Dec. 31, 2022. For context, the S&P 500 (^GSPC +0.80%) delivered a 24,708% return over the same stretch -- and that's with dividend payouts included.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Investors frequently look to Berkshire Hathaway's annual shareholder meeting and the company's quarterly-earnings reports for guidance as to where stocks may be headed next. Unfortunately, investors might not like what they see in Berkshire's past two quarterly reports.
Warren Buffett's silent warning to Wall Street shouldn't go unheeded
In terms of revenue and profit, Berkshire Hathaway's fourth-quarter and first-quarter operating results were business as usual. But buried among the dozens of pages of reported data in Berkshire's past two quarterly reports are its cash-flow statements. Specifically, I'm talking about cash flows from investing activities.
For many years, the Oracle of Omaha's company has been sitting on a veritable treasure chest of cash. When this capital gets deployed into stocks, investors view it as a sign of confidence that Warren Buffett and his investing lieutenants, Ted Weschler and Todd Combs, see value in equities. But when Buffett and his team sell more equity securities than they purchase in a given quarter, it sends a different message.
NYSE: BRK.B
Key Data Points
During Q1, Berkshire Hathaway reported $2.873 billion in equity-security purchases and a whopping $13.283 billion in equity-security sales. That's $10.41 billion in net-equity security sales to begin 2023.
However, it's a continuation of what we witnessed during Q4 2022. In the December-ended quarter, the Oracle of Omaha and his lieutenants oversaw just $1.68 billion in equity purchases and $16.32 billion in equity sales. This works out to $14.64 billion in net-equity sales in Q4 and a combined $25 billion in net-equity security sales over the past two quarters.
To be clear, Warren Buffett is a long-term bull who's regularly cautioned folks not to bet against America. But $25 billion in net-equity security sales in a six-month span is a silent warning to Wall Street that one of our generations' greatest investors isn't seeing much in the way of value.
Despite the bear market downturn, stocks aren't cheap
Although Warren Buffett isn't one to try to time the market, the lack of buying on his and his lieutenants' part does have merit. In his own words, the Oracle of Omaha wants to "buy a wonderful company at a fair price." But even with all three major U.S. stock indexes falling into a bear market in 2022, equities remain relatively pricey.
Take the S&P 500 Shiller price-to-earnings (P/E) ratio as an example. Whereas the traditional P/E ratio is based on the price of a security or index to its trailing-12-month earnings, the Shiller P/E ratio is based on average inflation-adjusted earnings over the past 10 years. The Shiller P/E ratio is also known as the cyclically adjusted price-to-earnings ratio, or CAPE ratio.
S&P 500 Shiller CAPE Ratio data by YCharts.
Back-testing to 1870, the Shiller P/E ratio has averaged 17.02. As of the closing bell on May 5, 2023, it stood at 29.14. It's well above the historic norm, with more than a decade of cheap capital (i.e., low interest rates) and ease-of-access to information likely fueling this earnings-multiple expansion.
What's particularly unnerving is what's happened anytime the Shiller P/E ratio has surpassed 30. In the five previous instances where stock valuations became extended, the S&P 500 eventually went on to lose at least 20% of its value. Take note, the Shiller P/E surpassed 30, once again, in February 2023.
Berkshire Hathaway's largest investment holding Apple (AAPL 0.85%) is another perfect example of equities not being cheap. Despite having inflation as a tailwind, the largest publicly traded company in the U.S. by market value expects sales and profits to decline in 2023. Yet even with no growth, Apple stock is commanding a lofty P/E ratio, based on Wall Street's fiscal 2023 consensus, of 29. Note, Apple shares traded at an earnings multiple of between 10 and 15 from the start of 2013 through 2018.
Warren Buffett's $25 billion silent warning may spell trouble to come for stocks.
Image source: Getty Images.
The Oracle of Omaha's competitive edge is his long-term mindset
Although there is no shortage of market indicators raising eyebrows at the moment, it's equally important to put Warren Buffett's silent warning into context.
To start with, the Oracle of Omaha could be wrong. While he's handily outpaced the broader markets for nearly six decades, Buffett also left billions of dollars on the table by selling Walt Disney early and made poor decisions, in hindsight, when exiting his company's stake in airlines and Wells Fargo in recent years. Buffett is fallible just like any other investor.
More importantly, time has proved to be Warren Buffett's competitive edge. Even though Berkshire Hathaway's cash-flow statements appear to show some skepticism on the part of Buffett and his team about current stock valuations, the Oracle of Omaha understands the power of having a long-term mindset.
For instance, the S&P 500 has undergone 39 separate double-digit percentage declines since the start of 1950. Excluding the current bear market, the index-based downturn associated with every single correction, crash, and bear market has eventually been recouped by a bull market rally. Buffett is aware that stock market downturns and economic hiccups tend to be short-lived, which is why he's positioned Berkshire Hathaway's portfolio to take advantage of long-winded economic expansions and bull markets. Timing the market has never been Buffett's forte; but time in the market certainly has.
Though Buffett's lack of buying since the start of October may spell trouble to come for Wall Street in the short run, history shows that any sizable downturn would be a red-carpet event for patient investors to put their money to work in "wonderful companies at a fair price."
