Few money managers command the attention of professional and everyday investors quite like Berkshire Hathaway's (BRK.A +0.21%)(BRK.B +0.22%) chief, Warren Buffett.
Since the Oracle of Omaha became CEO of Berkshire 60 years ago, he's overseen a cumulative return in his company's Class A shares (BRK.A) of more than 6,340,000%, as of the closing bell on March 18. For the sake of comparison, the benchmark S&P 500 (^GSPC +0.26%) has gained around 37,300%, inclusive of dividends, over the same timeline. When you run circles around the stock market's benchmark index by this wide of a margin, you're going to draw a crowd.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Throughout his six decades at the helm, Buffett has been an unwavering optimist. This is to say that he recognizes the U.S. economy and stock market spend a disproportionate amount of time growing, which is favorable to patient investors whose portfolios are positioned to take advantage of long-winded economic expansions and bull markets.
But even with a record amount of cash on hand -- this includes cash, cash equivalents, and U.S. Treasuries -- Wall Street's longtime optimist likely hasn't been buying much for one very good reason.
Warren Buffett has been a net seller of stocks for nine consecutive quarters
When 2024 came to a close, Berkshire Hathaway held a record $334.2 billion in combined cash, cash equivalents, and Treasuries on its balance sheet. It's a treasure chest that would be the envy of most publicly traded companies and can provide unparalleled financial flexibility. But for the investment-focused Berkshire Hathaway, a large cash position isn't what investors want to see.
Based on regulatory filings from earlier this week, Berkshire's CEO has added to his company's respective stakes in Japan's five major trading houses: Mitsubishi, Itochu, Mitsui, Sumitomo, and Marubeni. The Oracle of Omaha reached an agreement recently that allows Berkshire Hathaway to gradually increase its stakes in these five indefinite holdings beyond 10%.
Form 4 filings with the Securities and Exchange Commission from January and February also show some very selective buying activity in satellite-radio operator Sirius XM Holdings, integrated oil and gas operator Occidental Petroleum, and domain-name registry service VeriSign.
NYSE: BRK.B
Key Data Points
While this recent purchasing activity might sound positive -- especially with the S&P 500 and Nasdaq Composite both falling correction territory this month -- it should be taken with a grain of salt. For more than two years, Berkshire's head honcho has been a decisive net seller of stocks.
Without going into a detailed quarter-by-quarter breakdown, Warren Buffett has sold more stocks than he's purchased, based on Berkshire's cash flow statements, for nine consecutive quarters. The cumulative value of this net-selling activity is a whopping $173 billion. It's the primary reason Berkshire's cash position has soared to a record high.
In addition to selling more stocks than he's purchased every quarter since Oct. 1, 2022, Buffett passed on buying his favorite stock during the entire second half of 2024. This "favorite stock" in question is none other than shares of his own company. Since the rules governing buybacks were amended on July 17, 2018, Buffett green-lit nearly $78 billion in cumulative share repurchases. Further, buybacks occurred for 24 consecutive quarters (July 2018-June 2024).
There's one very obvious explanation for Buffett's ongoing net-selling activity and his sudden cold-turkey approach to his favorite stock: valuation.
Image source: Getty Images.
"Price is what you pay; value is what you get"
Out of the long list of words and phrases that can be used to describe Warren Buffett, nothing encapsulates his approach more than "value investor." While Buffett has been known to break an investing rule of his own from time to time, the one unwavering aspect of his investing approach is his desire to buy wonderful companies at an attractive/fair price.
During the heart of the financial crisis, in Berkshire Hathaway's 2008 letter to shareholders, Buffett penned what might be his most famous nugget of value-investing wisdom, courtesy of teachings from Ben Graham: "Price is what you pay; value is what you get."
This quote speaks to the idea that a company's share price may not always be reflective of its underlying performance or its long-term intrinsic value. Berkshire's chief remains steadfastly focused on value and has proved more than willing to wait for the "price" component of stocks to come back to a level that meets his definition of value.
The plain-as-day reason Warren Buffett probably isn't buying much, including shares of his own company's stock, is because value is virtually nonexistent at the moment.
JUST IN 🚨: Warren Buffett Indicator hits a new all-time high of more than 203%, surpassing the Dot Com Bubble, the Global Financial Crisis, and the 2022 Bear Market 🐻 pic.twitter.com/44Kio9jFQd
-- Barchart (@Barchart) November 29, 2024
In a 2001 interview with Fortune magazine, Buffett referred to the market-cap-to-GDP ratio as "probably the best single measure of where valuations stand at any given moment." This valuation tool, which divides the total market cap of publicly traded companies by U.S. gross domestic product (GDP), has become known as the "Buffett Indicator."
When back-tested to 1970, the Buffett Indicator has averaged a reading of 85% -- i.e., the aggregate value of all publicly traded companies equals 85% of U.S. GDP. On the day prior to the S&P 500 hitting its all-time high, the Buffett Indicator peaked at 207.33%. It's never been this far above its historic mean.
It's a somewhat similar story for Berkshire Hathaway stock. On March 18, Berkshire Hathaway's Class A shares were trading at a 74% premium to book value. While the Oracle of Omaha regularly pulled the trigger on share buybacks when his company's stock was valued at a 20% to 50% premium to book value, he's chosen to sit on his hands and not spend a penny on buybacks with Berkshire stock at a 50% to 80% premium to book.
At his core, Warren Buffett is an unwavering value investor. No amount of cash, cash equivalents, or U.S. Treasuries on Berkshire Hathaway's balance sheet can convince him to alter his investing strategy. Until stock valuations (including that of his own company) notably retrace and provide attractive price dislocations, Buffett is likely to remain exceptionally picky with his purchases and be a net seller of stocks.
