When Berkshire Hathaway (BRK.A 0.04%)(BRK.B 0.32%) CEO Warren Buffett speaks, professional and everyday investors tend to pay very close attention. That's because the Oracle of Omaha, as he's now affably known, has absolutely run circles around the benchmark stock indexes over a nearly six-decade span. Whereas Berkshire's Class A shares (BRK.A) have galloped higher by more than 4,200,000% in 58 years, the benchmark S&P 500 (^GSPC +0.77%) hasn't even topped a 30,000% aggregate gain, including dividends paid, over the same timeline.
Riding Warren Buffett's coattails has been a proven moneymaking strategy for decades, which is why investors wait on the edge of their seats for quarterly Form 13Fs to show what he and his investment team have been buying and selling.
However, investors don't have to wait for Berkshire Hathaway's quarterly 13Fs to get an idea of what the Oracle of Omaha has been up to. Berkshire's quarterly operating results can provide this answer. Unfortunately, investors may not be thrilled with what they find.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett's long-term ethos doesn't always align with his short-term actions
If there's one constant with Warren Buffett, it's his belief that investors should never bet against America. The Oracle of Omaha understands that while recessions are a normal part of the economic cycle, they're relatively short-lived. By comparison, most economic expansions have lasted multiple years, if not a full decade. The long-term expansion of the U.S. economy is what entices Buffett and his team to hang onto their holdings for extended periods.
However, Warren Buffett's long-term ethos and his short-term actions don't always align.
Berkshire Hathaway's third-quarter cash flow statement speaks volumes using just a few numbers. In particular, Buffett's company purchased precisely $1.7 billion worth of equity securities during the September-ended quarter. This compares to the disposal of $6.953 billion worth of equity securities. All told, Berkshire Hathaway was a net-seller of $5.253 billion worth of equities.
NYSE: BRK.B
Key Data Points
But this isn't the first quarter that Buffett and his team sold more in stocks than they've purchased. It's been a theme in each of the past four quarters (starting Oct. 1, 2022):
- In the fourth quarter of 2022, Berkshire was a net-seller of $14.64 billion in equities.
- During the first quarter of 2023, Buffett oversaw $10.41 billion in net-equity security sales.
- In the second quarter of 2023, Berkshire had $7.981 billion in net-equity security sales.
Altogether, Warren Buffett and his investing lieutenants, Todd Combs and Ted Weschler, have overseen $38.28 billion in net-equity security sales over the past year. The writing is on the wall that these investing greats don't see much in the way of value right now.
Stock valuations leave a lot to be desired
If investors were to look back five to 10 years from now, stocks would almost certainly look cheap relative to their earnings growth potential. But as things stands right now, stocks are anything but cheap.
While there are a number of ways to "value" the stock market, the S&P 500's Shiller price-to-earnings (P/E) ratio is the metric that paints the most worrisome picture for Wall Street.
The Shiller P/E ratio, which is commonly referred to as the cyclically adjusted price-to-earnings ratio (CAPE ratio), is based on average inflation-adjusted earnings from the previous 10 years. The advantage of the Shiller P/E, compared to a traditional P/E ratio that analyzes only one year worth of earnings history, is that it helps to smooth out changes in corporate earnings. This can help minimize the impact of wild profit swings, such as was experienced during the COVID-19 pandemic.
S&P 500 Shiller CAPE Ratio data by YCharts.
When back-tested to 1870, the S&P 500's Shiller P/E has averaged a little over 17. It closed on Monday, Nov. 6, 2023, at nearly 30.
What's even more concerning than the Shiller P/E nearing twice its average reading over the past 153 years is what's happened to the S&P 500 when the Shiller P/E crosses 30. Since 1870, there have only been six instances where the Shiller P/E surpassed and sustained a reading of 30 during a bull market rally. Following the previous five instances, the benchmark S&P 500 lost at least 20% of its value. Throughout much of 2023, the S&P 500's Shiller P/E ratio has been at or above 30, marking the sixth such instance.
To be clear, the Shiller P/E ratio isn't a tool that can be used to time directional moves in the stock market. But on a purely correlative basis, it demonstrates that stock valuations can't remain extended in perpetuity. Buffett and his lieutenants selling nearly $38.3 billion more in stocks than they've purchased over the past year implies a lack of good deals available, and at least indirectly suggests that stock prices are expected to decline.
Image source: Getty Images.
Patience is the Oracle of Omaha's not-so-secret weapon
Considering that Berkshire Hathaway's available cash pile grew to a record $157 billion by the end of the third quarter, some investors are clearly going to be disappointed to see Buffett, once again, passing on putting this capital to work. However, being patient is what's made Warren Buffett such a phenomenal investor.
While waiting for stock valuations to come back to a range that the Oracle of Omaha and his lieutenants would find attractive, they're reaping the rewards of a significant uptick in short-term Treasury yields. Berkshire Hathaway is poised to generate north of $6 billion in annual interest income on the $126.4 billion invested in U.S. Treasury bills, as of Sept. 30.
Warren Buffett also realizes that time is his greatest ally on Wall Street. He's packed Berkshire Hathaway's $346 billion investment portfolio with dozens of cyclical businesses -- i.e., companies that are going to ebb and flow with the health of the U.S. economy. Since only three of the 12 U.S. recessions after World War II have lasted at least 12 months, the Oracle of Omaha realizes that his cyclical investments are going to benefit from disproportionate expansions of the U.S. and global economy.
"Disproportionate expansions" can be seen on Wall Street, as well. According to wealth management company Bespoke Investment Group, the average bear market for the S&P 500, dating back to the start of the Great Depression in September 1929, is 286 calendar days (roughly 9.5 months). Comparatively, the average S&P 500 bull market has lasted 1,011 calendar days, or approximately two years and nine months.
Though it's impossible to know when stock valuations will pique the Oracle of Omaha's interests again, he and his team will have a veritable treasure chest of cash to (eventually) put to work.
