All three major benchmarks roared higher last year amid a general sense of optimism -- from anticipation of a lower interest rate environment to expectations of high growth from artificial intelligence (AI) players. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq each climbed in the double digits. Meanwhile, one of the world's most famous investors wasn't hopping on the bandwagon.
Warren Buffett, true to his style of being "fearful when others are greedy" and "greedy only when others are fearful," was a net seller of stocks. As chairman of Berkshire Hathaway, he built up a record cash position of $334 billion. On top of this, Buffett reduced positions in some of his favorite stocks, including his biggest holding, Apple. In a particularly shocking move, the famous investor also closed his position in a Vanguard fund that, according to a top analyst, may soar 169%.
All of this is particularly interesting in light of what's happening in the market today. Indexes have tumbled in recent days -- with the Nasdaq reaching into correction territory -- on concerns about the economy ahead. President Donald Trump's launch of tariffs on imports from the United States' three biggest trading partners ignited the concerns, with the idea that higher prices could hurt corporate profits and the consumer's wallet.
Does Buffett -- who's always had a keen sense of what's to come -- know something Wall Street doesn't? Let's find out.
Image source: The Motley Fool.
Buffett's market-beating track record
First, let's talk a bit about Buffett's track record and style. The billionaire has led Berkshire Hathaway to a compounded annual gain of nearly 20% over 59 years compared to a 10% increase for the S&P 500. This is thanks to Buffett's focus on hand-selecting quality stocks and buying them at reasonable or even bargain prices then holding on for the long term. As mentioned, Buffett never jumps into market trends and often does just the opposite of what the crowd's doing -- and all of this has worked year after year.
Buffett also has always expressed a great confidence in American businesses in general. Though the billionaire favors stock picking, to gain exposure to a large number of the best American companies, he's recommended a solid S&P 500 index fund that tracks the benchmark. In fact, Buffett himself owned two of them -- until recently.
Now, this brings me to Buffett's latest standout move. In the fourth quarter, the top investor closed out his positions in the Vanguard S&P 500 ETF (VOO 0.77%) and the SPDR S&P 500 ETF Trust (SPY 0.81%), two funds that mimic the composition and the performance of the major benchmark. Tom Lee, head of research at Fundstrat Global Advisors, last year predicted the S&P 500 may soar to 15,000 by 2030, and that suggests the index funds, too, could deliver the same returns. From the S&P 500's closing level on March 11, the forecast represents a gain of 169%.
Tom Lee says the market is overreacting
Lee remains more optimistic than many market participants in recent days, as indexes have declined. He said during a CNBC interview that the drop on Monday of this week was an overreaction and considers the market full of attractive buying opportunities, but he also said he would be watching upcoming economic data closely.
As even Lee acknowledges, it's still too early to draw firm conclusions about the economy ahead until we have more information about Trump's tariffs and get a look at more economic data. The President initially rolled out his plan then made various adjustments, such as delaying the launch on certain goods for a month. So, there may be more opportunities for companies, industries, and countries to negotiate with the Trump administration.
Buffett considered these clues
Now, let's get back to our question: Does Buffett know something Wall Street doesn't? Not necessarily. But the top investor, as he's done in the past, clearly takes to heart certain clues about what might happen next in the market.
For example, stocks in recent times reached exceptionally expensive levels, as we can see in the S&P 500 Shiller CAPE ratio. This metric takes into account stock price and earnings per share over a 10-year period to account for fluctuations in the economy. And late last year, it surpassed the level of 37, something it's only done twice before since the benchmark's launch as a 500-company index in the late 1950s.
S&P 500 Shiller CAPE Ratio data by YCharts.
With prices this high, the value-focused Buffett surely saw this as a moment to lock in profits and remain cautious; the top investor, in his shareholder letter last year, already mentioned the increasing presence of "casino-like behavior" in the market. This may have been another point that made Buffett more of a seller than a buyer of stocks.
What does this mean for investors?
What does this mean for you as an investor? It's important to note that all of this doesn't suggest Buffett has lost faith in the S&P 500 or individual stocks. In the recent quarter, he made some purchases when valuations looked reasonable and told shareholders he would always invest "the great majority" of their money in equities.
Buffett's sells also generally concern positions he's held for quite some time. At a certain point, it makes sense to close or reduce a position and allocate the winnings into the next great bargain. We don't know exactly why Buffett sold the Vanguard and SPDR index funds, but he could be preparing to invest more in individual stocks. That doesn't indicate pessimism about what's ahead; instead, it signals that there may be many buying opportunities out there today and down the road. Buffett may already be putting his huge cash pile to work as valuations have come down.
So, this top investor's moves don't mean we should flee the market. Instead, they emphasize the importance of focusing on the essentials, such as valuation and a company's long-term prospects -- and not being afraid of going against the crowd.
