For the better part of six decades, Berkshire Hathaway (BRK.A 0.39%)(BRK.B 0.27%) CEO Warren Buffett has been putting on a show for Wall Street. Since taking over in the mid-1960s, the "Oracle of Omaha," as he's now affably known by investors, has overseen a greater than 4,400,000% aggregate return in his company's Class A shares (BRK.A). For those of you without a calculator, were talking about a nearly 20% annualized return spanning six decades.
Though Warren Buffett is far from perfect, his undeniable long-term success often leaves Wall Street and investors on the edge of their proverbial seats waiting for updates on what the Oracle of Omaha (and his investment team) has been buying and selling.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett's $157 billion warning to Wall Street
Two weeks ago, Berkshire Hathaway filed Form 13F with the Securities and Exchange Commission, which outlined what stocks were purchased, sold, and held in the most recent quarter. While there is one brand-new value stock Buffett and his investing lieutenants (Todd Combs and Ted Weschler) piled into, the prevailing theme of the third quarter is the same as the prior three quarters: net-equity sales.
When Berkshire Hathaway reports its operating results every three months, the company's cash-flow statement provides a crystal-clear picture of how much Buffett's company spent purchasing equities during the quarter, as well as how much was sold. While this doesn't tell investors which stocks are being purchased or sold, it offers a broad-based view of whether the Oracle of Omaha and his top aides are bullish or bearish in the short run.
During the September-ended quarter, Berkshire Hathaway sold $5.253 billion more in securities than it purchased. This continued a streak of net-equity sales of $7.981 billion in the second quarter, $10.41 billion in the first quarter, and $14.64 billion in fourth quarter of 2022. Altogether, Buffett has overseen the sale of $38.3 billion more in equity securities than has been purchased over the trailing year (ended Sept. 30).
NYSE: BRK.B
Key Data Points
Paring down his company's investment portfolio, coupled with raking in billions of dollars in easy annual income from dividends and interest payments, has ballooned Berkshire Hathaway's cash position to $157.2 billion -- an all-time record.
Normally, a hearty cash position would be viewed favorably by Wall Street and investors, especially during periods of economic uncertainty. But this isn't one of those instances.
For more than a half-century, Warren Buffett and his team have made a living by deploying their company's cash via investments and acquisitions. A growing cash pile that's regularly being rerouted to short-term government bills yielding around 5% instead of stocks/acquisitions is a pretty clear indication that neither the Oracle of Omaha nor his aides see much in the way of value right now with the stock market.
The stock market, and its key drivers, are historically expensive
Let me make clear that I'm not putting words into Warren Buffett's mouth. He remains an avid long-term supporter of the stock market and strongly believes that investors shouldn't bet against America. But a growing cash pile amid a rallying stock market leaves few conclusions other than Buffett and his investing lieutenants don't believe stocks are attractively priced.
The most-damning bit of evidence on the valuation front is the S&P 500's (^GSPC 1.33%) Shiller price-to-earnings (P/E) ratio, which is also referred to as the cyclically adjusted P/E ratio, or CAPE ratio.
Whereas the traditional P/E ratio is based on trailing-12-month earnings, the Shiller P/E is based on average inflation-adjusted earnings from the previous 10 years. The advantage of using 10 years' worth of earnings data is that it smooths out potentially wild earnings fluctuations, such as the initial drop-off following the start of the COVID-19 pandemic.
S&P 500 Shiller CAPE Ratio data by YCharts.
Over the past 153 years, the average reading for the S&P 500's Shiller P/E is just shy of 17.1. As of the closing bell on Nov. 21, the Shiller P/E for the S&P 500 clocked in at 30.72.
However, being 80% above the 153-year mean isn't what's most concerning. Over the past century, the S&P 500 Shiller P/E has surpassed 30 during a bull market run on only six occasions. Following the previous five instances, the benchmark index plunged at least 20%. The sixth instance is occurring right now.
Keep in mind that the Shiller P/E ratio isn't a timing tool. It's not going to tell investors when downturns in the broader market will occur. In other words, premium valuations with stocks can stick around for weeks, months, or even years. There's simply no way to know ahead of time when the tide will turn.
But the Shiller P/E does demonstrate that extended valuations can't continue in perpetuity. Eventually, valuations matter and the broader market heads lower.
AAPL PE Ratio data by YCharts.
This is especially concerning with the "Magnificent Seven" -- Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla -- sporting historically high valuations.
The Magnificent Seven have accounted for an outsized percentage of the S&P 500's year-to-date gains. While a few components are historically attractive relative to their future cash flow potential (Alphabet and Amazon), most of the Magnificent Seven are pricier than they've just about ever been. Tesla trades at 7 times the P/E of most auto stocks; Nvidia has a triple-digit P/E over the trailing-12-months; and Apple's P/E hit 31 despite declining sales.
Berkshire Hathaway's $157 billion cash pile is a subtle warning that investors should be cautious, at least in the near term.
Patience has been a winning ingredient for Warren Buffett and his shareholders
Considering how successful Warren Buffett has been putting capital to work for more than 50 years, it's probably a bit disappointing to see the Oracle of Omaha effectively punting his opportunities down the road and accepting billions of dollars in interest income in the meantime via short-term government debt securities.
However, Buffett has been in this situation before. He's navigated well over a half-dozen U.S. recessions and dozens of stock market corrections and come out a smarter, better investor on the other end. Patience continues to be his winning ingredient; and it's worked out pretty well for Berkshire's shareholders, too.
Image source: Getty Images.
For instance, there have been 39 double-digit percentage declines in the broad-based S&P 500 since the start of 1950. That's one notable downturn, on average, every 1.9 years. With the exception of the 2022 bear market, each of these moves lower were eventually cleared away by a bull market. Though we're never going to know precisely when these downturns will begin or end, history shows that stock valuations tend to expand over time in lockstep with the U.S. economy. It's precisely why Warren Buffett suggests investors never bet against America.
It also doesn't hurt that bull markets last substantially longer than bear markets. Data from investment analysis company Bespoke Investment Group shows that the average S&P 500 bear market dating back to the start of the Great Depression (Sept. 1929) has lasted only 286 calendar days. Meanwhile, the typical bull market over the past 94 years has endured 1,011 calendar days, or roughly 3.5 times as long.
While it would be great to see the Oracle of Omaha putting his company's cash to work in stocks or via a major acquisition, Buffett isn't going to bend his valuation parameters. Patience has paid off handsomely on Wall Street for more than a century, and when the time is right, Buffett and his team have more than enough capital to pounce.
