Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett is truly in a league of his own when it comes to investing. Since taking over as CEO in 1965, he's overseen an aggregate return in his company's Class A shares (BRK.A) of nearly 4,000,000% as of May 14, 2023. On an annualized basis, as of Dec. 31, 2022, Berkshire Hathaway stock has doubled-up the total return, including dividends paid, of the broad-based S&P 500 (^GSPC 1.02%) over the past 58 years (19.8% vs. 9.9%).
Although the Oracle of Omaha is just as fallible as any other investor, this incredible track record earns him an audience of more than 30,000 people at Berkshire Hathaway's annual shareholder meeting in Omaha, Nebraska.
However, this vast audience of shareholders and investors, along with Wall Street, may not be thrilled with what they heard from Warren Buffett during the latest annual meeting.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett continues to be a net seller of stocks
To be upfront, Warren Buffett, Executive Vice Chairman Charlie Munger, and Berkshire's other key leaders set an optimistic tone about the U.S. economy and stock market over the long run during the company's recent annual meeting. Buffet has been quite clear to never bet against America.
But what the Oracle of Omaha preaches over the long run and what he does over shorter periods can sometimes be at odds.
For instance, look no further than Berkshire Hathaway's buying and selling activity since the start of October 2022. During the fourth quarter, Buffett and his investing lieutenants, Todd Combs and Ted Weschler, oversaw the purchase of $1.68 billion in equities and a whopping $16.32 billion in equity sales. That equates to $14.64 billion in net-equity sales in the December-ended quarter.
It was much of the same in the recently reported first quarter. Berkshire's quarterly filing showed $2.87 billion in equity-security purchases and $13.28 billion in equity-security sales, which work out to $10.41 billion in net-equity security sales.
And here's what Warren Buffett had to say during his latest annual shareholder meeting, just prior to the question-and-answer session:
So I show at the bottom what's happened with cash and treasury bills through March 31. And I will tell you that the -- in the month of April, we probably added about $7 billion to that factor. Now part of that is because we didn't buy as much stock because that reduces cash and treasury bills. We bought about $400 million worth of stock in the month of April. That's a minus in terms of cash available.
And we, however, sold net some stock, which produced maybe $4 billion. And of course, we had operating earnings, probably $2.5 billion or something in that area. And my guess is we probably increased our cash and treasury both $6 billion and $7 billion in the month.
In other words, Warren Buffett and his team look to have sold a net of $4 billion in equities during the month of April. That's 4 billion additional reasons, atop the $25 billion in net-equity sales between Oct. 1, 2022 and March 31, 2023, for investors to be cautious.
Twenty-nine billion dollars in net-equity sales since October suggest stocks aren't cheap
As noted, Warren Buffett strongly believes in the long-term success of America and views the stock market as one of the top wealth-creating tools on the planet. But after approximately $29 billion in net-equity sales spanning seven months, it's a pretty fair assumption that he and his investment team don't believe stocks are particularly cheap -- and there are certainly data points to back that up.
For example, the Shiller price-to-earnings (P/E) ratio, which is sometimes known as the cyclically adjusted P/E, or CAPE ratio, suggests stocks are pricey. The Shiller P/E is based on average inflation-adjusted earnings over the past 10 years.
S&P 500 Shiller CAPE Ratio data by YCharts.
Back-testing the Shiller P/E all the way to 1870 produces an average P/E ratio of 17. By comparison, the S&P Shiller P/E closed out this past week just shy of 29.
What's even more worrisome is what happens anytime the Shiller P/E ratio surpasses and holds above 30. In the five previous instances where this has occurred, the broad-based S&P 500 eventually went on to lose at least 20% of its value. For what it's worth, the Shiller P/E surpassed 30, once more, in early February 2023.
It's also getting increasingly difficult to find "wonderful companies at a fair price." Apple (AAPL -0.35%), which is Berkshire's largest investment holding by a substantial amount, is valued at 32 times Wall Street's consensus-earnings forecast for fiscal 2023. Subdued iPhone sales and the expectation of economic weakness have Wall Street projecting an 11% decline in Apple's full-year revenue in fiscal 2023.
It's a similar story with Coca-Cola (KO), which is Berkshire's third-largest holding. Though Coca-Cola is an exceptionally safe stock with a top-tier marketing department and virtually unparalleled geographic diversity, prospective investors are paying 28 times trailing-12-month earnings and nearly 25 times forecast profits in 2023 to own shares of a company growing sales by a modest 4%. Keep in mind this 4% sales growth includes the benefit of above-average inflation.
Warren Buffett and his lieutenants want a good deal, and there simply aren't many to be found on Wall Street at the moment.
Image source: Getty Images.
Warren Buffett's long-term mindset is a winner
While one of Wall Street's most revered investors selling $29 billion in net equities since the start of October isn't encouraging, it's not a major cause for concern either -- if you share the same long-term mindset as the Oracle of Omaha.
In Warren Buffett's view, stock market corrections and bear markets are blessings in disguise. Since Berkshire Hathaway often takes a couple of quarters, or even years, to build positions in the companies it likes, a downtrodden market can be the perfect excuse to go shopping. There have been 39 double-digit percentage corrections in the S&P 500 since the beginning of 1950, meaning Berkshire's CEO has navigated his way through a downturn or two.
Additionally, as I noted earlier this week, Warren Buffett's penchant for pickiness has paid off in a big way. The Oracle of Omaha is willing to wait for a "fair price" before buying stakes in the companies he favors but isn't shy about piling in once he finds a business at a fair price that possesses a sustainable moat, well-known brand, and effective management team. It's precisely why companies like Apple, Bank of America, and Coca-Cola comprise well over half of Berkshire Hathaway's invested assets.
It also pays to be optimistic. Though bears have had their share of the spotlight, the S&P 500 has spent approximately 2.6 calendar days in a bull market for every 1 day spent in a bear market since the beginning of 1950.
This disproportionate optimism can be seen in stock returns, too. While this isn't to say short sellers can't profit, there hasn't been a single 20-year rolling period, backdated to 1900, when the S&P 500 wouldn't have generated a positive total return, including dividends, for investors. Put another way, if you were to have purchased an S&P 500 tracking index at any point since the beginning of 1900 and held that position for 20 years, you made money. It's why the Oracle of Omaha suggests everyday investors purchase index funds, and it perfectly explains why he's so bullish on America over the long run.
Warren Buffett's actions may not always match his words in the short term, but that's never been an issue over longer periods.
