There arguably isn't a money manager who commands the attention of professional and everyday investors on Wall Street quite like Berkshire Hathaway (NYSE: BRK.A) (BRK.B +1.32%) CEO Warren Buffett. But when you practically double up the average annual total return, including dividends, of the benchmark S&P 500 (^GSPC 0.39%) spanning almost six decades, you're bound to earn quite the following.
Additionally, investors appreciate the Oracle of Omaha's generally open-book approach in his annual letter to shareholders and during his roughly five-hour question-and-answer session during Berkshire Hathaway's annual shareholder meeting. Buffett regularly shares the characteristics he looks for in businesses when putting Berkshire's capital to work.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But as we've witnessed over the last two years, Warren Buffett's words and actions don't always align.
Buffett has been a decisive seller of stocks for two years
If you were to read through decades of annual shareholder letters from Buffett, or listen to hours of Q&A sessions during Berkshire Hathaway's annual shareholder meetings, you'd quickly realize that the Oracle of Omaha is an unabashed long-term optimist. He's frequently opined that investors shouldn't bet against America, which seems like sage advice, given the expansion of the U.S. economy over the long run.
However, what Warren Buffett preaches over extended timelines isn't always compatible with his short-term trading activity.
Beginning in the fourth quarter of 2022 (Oct. 1, 2022), Warren Buffett and his top investment aides, Ted Weschler and Todd Combs, began paring down their company's investment portfolio in a meaningful way. Thanks to Berkshire Hathaway's cash flow statements, we know with concrete certainty that Buffett and his crew have been net sellers of equities for seven consecutive quarters:
- Q4 2022: $14.64 billion in net-equity sales
- Q1 2023: $10.41 billion
- Q2 2023: $7.981 billion
- Q3 2023: $5.253 billion
- Q4 2023: $0.525 billion
- Q1 2024: $17.281 billion
- Q2 2024: $75.536 billion
For those keeping score at home, this represents $131.6 billion more in stock sales than purchases between Oct. 1, 2022 and June 30, 2024.
NYSE: BRK.B
Key Data Points
When Berkshire Hathaway delivers its third-quarter operating results in two weeks, there's a very high probability that an eighth consecutive quarter will be added to this series. Since the midpoint of July, Buffett has overseen the sale of roughly 266 million shares of Bank of America stock, worth more than $10 billion.
Warren Buffett's actions very clearly portend trouble for Wall Street.
The Oracle of Omaha's persistent selling foreshadows trouble for the stock market
If there's one unwavering consistency when it comes to Buffett's investment philosophy, it's his desire to get a good deal. He's an ardent value investor who has no qualms about sitting on his hands and waiting for stock valuations to reach what he would deem a "fair" multiple.
At the moment, value is almost impossible to find. Except for piling into Wall Street's most-anticipated reverse stock split of 2024, Buffett has chosen to pare down Berkshire Hathaway's portfolio and build up his company's cash position to, hopefully, take advantage of price dislocations during the next big downswing.
Though "value" is entirely subjective, one valuation measure, with a successful track record of making apples-to-apples comparisons when back-tested more than 150 years, shows Wall Street is at one of its priciest earnings multiples in history!
S&P 500 Shiller CAPE Ratio data by YCharts.
As of the closing bell on Oct. 22, the S&P 500's Shiller price-to-earnings (P/E) ratio, which is also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), closed at 37.27. This is just a hair below its high for the year, which represents the third-highest reading during a continuous bull market dating back to January 1871.
What makes the S&P 500's Shiller P/E such a useful metric is that it takes into account average inflation-adjusted earnings from the previous 10 years. Whereas the traditional P/E ratio, which only factors in trailing-12-month earnings per share (EPS), can be easily thrown off by shock events (e.g., the COVID-19 pandemic), the Shiller P/E factoring in a decade's worth of EPS history allows for more accurate historic valuation comparisons.
Over the last 153 years, there have only been six instances where the Shiller P/E has topped 30 during a bull market. Following the five prior occurrences, the S&P 500, Dow Jones Industrial Average (^DJI +0.11%), and/or Nasdaq Composite (^IXIC 0.73%) shed between 20% and 89% of their value. Although the Shiller P/E ratio isn't a timing tool, it has, thus far, an immaculate track record of forecasting eventual big-time downside in Wall Street's major stock indexes.
Image source: Getty Images.
Buffett's actions also point to the power of perspective and time
While the Oracle of Omaha's actions send a very clear message to investors that premium valuations for many of Wall Street's leading businesses aren't sustainable over the long run, they also offer hope.
For instance, you'll note that Warren Buffett, Ted Weschler, and Todd Combs aren't short-selling securities or buying put options. Even with stock valuations in nosebleed territory, Buffett and his team are smart enough not to bet against America.
To be clear, recessions and stock market downturns are normal and inevitable. But the key trait both share is their relatively quick resolutions.
Since the end of World War II in 1945, the U.S. economy has navigated its way through a dozen recessions, nine of which resolved in less than a year. Of the remaining three, none surpassed 18 months in length. Comparatively, two economic expansions topped the 10-year mark, with most periods of growth enduring multiple years. Buffett and his team realize the value of putting the odds in their favor -- and wagering on the U.S. economy to expand over time has been a wise move.
The same goes for the stock market.
In June 2023, shortly after the S&P 500 was confirmed to be in a new bull market, researchers at Bespoke Investment Group released the data set that calculated the calendar day length of every bear and bull market in the benchmark index dating back to the start of the Great Depression (September 1929).
It's official. A new bull market is confirmed.
-- Bespoke (@bespokeinvest) June 8, 2023
The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.
Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
As you'll note, bull markets stick around considerably longer than bear markets. Whereas the typical bear market resolved in 286 calendar days (about 9.5 months), the average bull market sustained for 1,011 calendar days (two years and nine months) over the previous 94 years. Nearly half of all bull markets (13 of 27) have also endured longer than the lengthiest bear market.
Warren Buffett is no more capable than you or me at pinpointing when the Dow Jones Industrial Average, S&P 500, or Nasdaq Composite will correct, or determining where the bottom will be. What he does have is decades of perspective that demonstrates the value of patience.
Despite being a big-time seller of stocks for the last two years, Buffett maintaining a still-sizable $314 billion portfolio at Berkshire Hathaway offers hope for the future and long-term-minded investors.
