Many investors pay close attention to whatever Warren Buffett says. The billionaire's conglomerate, Berkshire Hathaway (BRK.A 0.10%)(BRK.B 0.66%), has outperformed the market by a wide margin since he took it over in 1965, and he shares advice freely with his shareholders and followers.
Lately, it's more his actions that people have been focused on. Berkshire Hathaway has been a net seller of stocks for the past nine quarters, and its cash stockpile has grown to more than $344 billion -- its highest level ever. For a company that regularly buys stocks and occasionally entire companies, that's a lot of cash to have on hand, and everyone from financial industry insiders to armchair analysts has been speculating about why Buffett and his team are holding onto so much.
One thing that Buffett's followers know is that he doesn't like to overpay for his stocks. With the market down so far this year, are stocks cheap enough for him -- and you -- to buy right now? Here's what he just said.
Are we knee-deep in opportunities?
Buffett has on many occasions described what he looks for in an investment. In this year's annual shareholder's letter, he did so again, saying: "We own a small percentage of a dozen or so very large and highly profitable businesses with household names such as Apple, American Express, Coca-Cola, and Moody's. Many of these companies earn very high returns on the net tangible equity required for their operations."
He went on to explain that when he finds a "really outstanding business," he loves to buy the whole thing. Berkshire Hathaway now owns 189 subsidiary companies, many of which you'll recognize, like battery maker Duracell and paint company Benjamin Moore. It's also one of the largest furniture companies in the U.S., owning several retail chains in that niche.
Many really outstanding companies aren't willing to be wholly acquired, of course. But Berkshire Hathaway can always choose to buy a stake in a public company for its equity portfolio. Stocks are available to buy at any time, and, as Buffett emphasizes, "very occasionally, they sell at bargain prices."
Image source: The Motley Fool.
Buffett is known for his value approach to investing, which means that he looks for stocks that aren't trading at their true value, but that eventually will. However, although he clearly prefers to get a bargain, he has famously said: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
His actions as an investor back that up. Although Berkshire Hathaway has sold more stock than it has bought during the past two years, it continues to deploy capital where it sees opportunities. "Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities."
Does the recent market correction make this such a time?
My hunch is that even after this year's drop, valuations haven't gotten as low as Buffett would like. There still might have been enough opportunities for Buffett and his team to become net buyers instead of net sellers this quarter, but on the whole, valuations remain higher than normal, and I'm not sure he would describe Berkshire as being knee-deep in investment opportunities. The Schiller CAPE ratio, which measures the average price-to-earnings (P/E) ratio of the S&P 500 cyclically adjusted for inflation, has declined, but it's still near its highest level ever outside of the peak it climbed to right before the market slumped in 2022.
Fearful or greedy?
One of Buffett's most famous maxims is, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
When valuations are high and there's a strong bull market, that's the least likely time that Buffett is going to buy stocks. When there's enough fear to send the market down, that's when he will be most tempted to buy.
But investors should keep in mind that what's more important than finding bargains is finding great stocks at fair prices and putting your money to work. The earlier you start, the more you stand to gain. It's a mindset. If you believe in the future of the U.S. economy, you can invest at any time and hold for the long haul.
