Warren Buffett isn't called "the Oracle of Omaha" for nothing. The billionaire has proven his knowledge of the stock market over time, and as a result, Berkshire Hathaway has delivered market-beating performance over 58 years. As chairman, Buffett has helped the holding company generate a compounded annual gain of more than 19% over that time period -- that's compared with about a 10% such increase for the S&P 500.
So, it's clear Buffett generally has made the right decisions at the right times. This often involves going against the current market trends. In the past, this top investor wrote he and his team "attempt to be fearful when others are greedy and to be greedy only when others are fearful."
And it's possible this is what is happening right now. As the S&P 500 climbs, after already completing two years of double-digit gains, and investors pile into high-growth stocks such as artificial intelligence and quantum computing players, Buffett just made a shocking move -- and one that could be seen as a warning to investors. Does this famous investor know something Wall Street doesn't? Let's find out.
Image source: The Motley Fool.
A glimpse at the investing moves of experts
Friday was a big day for investors and the stock market in general as it offered them a glimpse into the latest moves of investing experts. Managers of more than $100 million in stocks must file form 13F with the Securities and Exchange Commission, detailing their latest buys and sells, on a quarterly basis. And that form was due this past Friday, Feb. 14.
It would be impossible to follow every move of every billionaire investor, but taking a look at these experts' latest moves could inspire us to make certain decisions that suit our investment strategies -- or offer us a clue about what may happen next in the market. And considering Warren Buffett's excellent long-term track record, it's a fantastic idea to turn to him first.
Before we talk about Buffett's surprising move in the fourth quarter of 2024, though, it's important to quickly discuss his general views on investing. The billionaire is known for value investing, meaning he aims to scoop up shares of companies that are trading for bargain valuations now -- but have what it takes to advance over time. Buffett also has a strong belief that solid American companies will win over the long run, and to gain exposure to these players, he's recommended that non-professional investors add a good S&P 500 Index fund to their holdings.
Buffett's shocking move
Buffett himself has held two -- the SPDR S&P 500 ETF Trust (SPY 1.38%) and the Vanguard S&P 500 ETF (VOO 1.38%) -- since the fourth quarter of 2019. But in a shocking move, Buffett in the recent quarter closed out both of these positions.
These funds, mimicking the composition of the S&P 500, offer investors exposure to the benchmark, so they will win or lose according to how the S&P 500 performs. The past two years, as mentioned, have been winning ones. Over time, the S&P hasn't delivered as much of a gain as Buffett's portfolio of carefully chosen stocks, but the index still has been a successful investment.
Today the S&P 500 continues to climb in this bull market, yet Buffett has sold these assets that offer exposure to the index's performance. Does this mean Buffett knows something Wall Street doesn't -- and thinks the index may be heading for a correction?
The market's "casino-like behavior"
We don't know exactly why Buffett made the move, but some may consider this as a warning about the possibility of declines to come. In his most recent shareholder letter, Buffett commented on the "casino-like behavior" in the market. And, knowing Buffett's affinity for value, he's surely noticed the S&P 500 is trading at one of its most expensive levels since it launched as a 500-company index back in the late 1950s. The Shiller CAPE ratio, an inflation adjusted measure of a company's earnings-per-share and stock price, has reached beyond 35 -- something it's done only twice before.
S&P 500 Shiller CAPE Ratio data by YCharts
So, Buffett may have decided to lock in profits ahead of any potential correction and allocate the funds to individual stocks -- he bought one new stock, Constellation Brands, and added to five positions in the quarter.
Still, Buffett's past comments highlight his belief in the S&P 500's value as a long-term investment and the strengths of American companies. In his 2013 letter to shareholders, he said that in his will he's advised a trustee to put 90% of his cash in an S&P 500 Index fund to benefit his wife.
He also wrote: "American business has done wonderfully over time and will continue to do so."
Now the next question is: What does this mean for you as an investor? Of course, it's impossible for any investor -- even Buffett -- to predict with 100% accuracy what the index will do next. So his decision -- or his team's decision -- to sell the S&P 500 index funds doesn't mean you should stay away from these funds or stocks in general. Instead, it highlights the importance of considering valuations and holding onto quality investments for the long haul. After all, even if the S&P 500 falls in the near future, it's likely to deliver a long-term win for you as it's done for many other investors, including Buffett, throughout its history.
