This is the week diehard investors have been waiting for. Wednesday, Feb. 14, marked the filing deadline for institutional investors with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission.
Put simply, a 13F provides investors with a clear snapshot of what Wall Street's brightest minds have been buying and selling in the latest quarter. Even though 13Fs display snapshots that could be 45 days old, they can still help investors recognize what stocks, trends, and industries have the attention of successful money managers.
Perhaps no 13F filing or money manager is watched more closely than Warren Buffett at Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%).
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
This has been the Oracle of Omaha's most telling move
The reason all eyes are on the affably named "Oracle of Omaha" is because of his stellar investment track record. Since becoming CEO of Berkshire in the mid-1960s, he's overseen an aggregate gain in his company's Class A shares (BRK.A) of better than 4,780,000%!
He also has a knack for finding plain-as-day values. Berkshire's longest-tenured holdings, which include the likes of Coca-Cola, American Express, and Moody's, have all delivered quadruple-digit unrealized gains, not accounting for their dividends.
But it's not the individual stocks that Buffett and his team are buying and selling that have stolen the show of late. Rather, it's the aggregate purchasing and sales activity in equities in recent quarters.
Although Berkshire Hathaway has yet to report its fourth-quarter operating results, as of this writing, there's been one constant for Warren Buffett and his investing aides since the start of October 2022: the net selling of equities.
- In the quarter ended Sept. 30, 2023, Berkshire was a net seller of $5.253 billion worth of equities.
- In the quarter ended June 30, 2023, Berkshire was a net seller of $7.981 billion worth of equities.
- In the quarter ended March 31, 2023, Berkshire was a net seller of $10.41 billion worth of equities.
- In the quarter ended Dec. 31, 2022, Berkshire was a net seller of $14.64 billion worth of equities.
Though the magnitude of net-selling activity has been tapering off since the fourth quarter of 2022, it doesn't change the fact that the Oracle of Omaha has been a net seller of nearly $38.3 billion worth of equities since Oct. 1, 2022 (not including the fourth quarter of 2023). This figure is considerably more telling than the individual stock moves listed on Berkshire Hathaway's 13F.
The blunt truth: Stocks are historically expensive
If there's one thing Warren Buffett has become a stickler for above all else, it's getting a good deal on the companies in which he invests. He's more than willing to sit on his hands and wait for wonderful businesses to retrace to what he deems a fair price.
What does Buffett's net-selling activity of almost $38.3 billion in equities since Oct. 1, 2022 tell investors? Value investing is slim pickings at the moment.
If there's a valuation index that perfectly encapsulates this right now, it's the S&P 500's (^GSPC 1.02%) Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically adjusted P/E ratio (CAPE ratio). Whereas a traditional P/E ratio examines a company's or index's trailing-12-month earnings, the Shiller P/E ratio is based on average inflation-adjusted earnings from the past 10 years. Looking back 10 years removes volatile one-off moves in earnings -- which is what investors witnessed during the COVID-19 pandemic.
When back-tested to 1870, the S&P 500's Shiller P/E ratio has averaged a multiple of a little over 17. However, it's spent almost the entirety of the past 30 years above this mark, which is a reflection of the internet democratizing trading and research for everyday investors, as well as interest rates falling.
S&P 500 Shiller CAPE Ratio data by YCharts.
As of the closing bell on Feb. 12, 2024, the Shiller P/E ratio clocked in at 33.8, which is nearly double its 154-year average.
What's particularly worrisome is what's happened throughout history when the Shiller P/E ratio surpasses 30 during a bull market rally. Following the previous five times the Shiller P/E topped 30, the broad-based S&P 500 fell by a minimum of 20%. The current valuation expansion marks only the sixth time since 1870 that the S&P 500's Shiller P/E has sustained above 30.
To be abundantly clear, the Shiller P/E ratio isn't a timing tool. There have been instances where valuations were extended to the upside for a couple of months before the benchmark index retraced. Comparatively, the Shiller P/E spent four years above 30 during the dot-com bubble (1997-2001) before plunging.
However, a reading above 30 does signify that stocks are collectively pricey. Warren Buffett isn't afraid to wait patiently on the sidelines, even as Berkshire Hathaway's cash pile continues to grow.
Image source: Getty Images.
Don't mistake Warren Buffett's patience for a lack of optimism
The persistent selling we've witnessed from the Oracle of Omaha and his investing aides, Todd Combs and Ted Weschler, is certainly enough to give investors pause, given how pricey the broader market is at the moment.
But one thing investors absolutely mustn't do is mistake Warren Buffett's patience for pessimism.
On more than one occasion, Buffett has suggested that investors "never bet against America." Even though he and his team are well aware that downturns in the U.S. economy and stock market are both normal and inevitable, he also realizes how disproportionate recessions are when compared to periods of growth.
Since World War II ended in September 1945, the U.S. economy has navigated its way through 12 official recessions. Nine of these downturns were ultimately resolved in less than a year, while the remaining three all failed to surpass 18 months.
On the other hand, most economic expansions have endured multiple years, with two periods of growth lasting at least a decade. This long-term growth in the U.S. and global economy is why Warren Buffett remains an optimist -- even as he and his team pare down Berkshire Hathaway's equity exposure.
Let's not forget that patience has also paid off handsomely for Buffett and Berkshire's shareholders. For instance, being patient allowed the Oracle of Omaha to nab preferred shares of Bank of America on the cheap in 2011, which he and his aides pivoted into a sizable common-stock position today.
Although Warren Buffett's short-term actions may not always align with his long-term ethos, there's no question that he remains optimistic about the U.S. economy and the dozens of high-quality, brand-name businesses currently in Berkshire Hathaway's investment portfolio.
