There's arguably not a money manager on Wall Street who garners attention from investors quite like Berkshire Hathaway's (BRK.A 1.12%) (BRK.B 1.03%) Warren Buffett. The big reason why... he's overseen a cumulative return in excess of 6,100,000% in his company's Class A shares (BRK.A) since taking the reins six decades ago. This is more than 150 times the total return, including dividends, of the benchmark S&P 500 (^GSPC 2.05%) over the same span.
The Oracle of Omaha is someone who has a keen understanding of economic and stock market cycles.
He and his team, which had included right-hand man Charlie Munger until his passing in November 2023, recognize that periods of economic growth and bull markets on Wall Street last significantly longer than economic recessions and bear markets. As such, they've always angled Berkshire Hathaway's investment portfolio and owned assets to take full of advantage of these lengthy periods of growth and upside. This horizon-looking approach is a big reason Buffett has been such a successful investor.
But Warren Buffett's long-term vision and his insatiable desire to get a good deal as a diehard value investor don't always align.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Four words from the Oracle of Omaha offer investors a grim reality
Historically, Berkshire Hathaway's shareholder meetings, which typically feature four-to-five-hour question-and-answer sessions with Warren Buffett and his team, along with his annual letter to shareholders, are packed with nuggets of wisdom that encapsulate Buffett's thought process when investing.
Yet every so often, the Oracle of Omaha sprinkles in a dose of reality that speaks to his value-oriented nature. In his latest (and last, since he's stepping down as CEO at the end of the year) annual letter to shareholders, Berkshire's chief penned four words that offer a grim but needed reality to the investing community: "Often, nothing looks compelling."
In each of the last 10 quarters, Buffett has been a net-seller of stocks. Cumulatively, he's overseen the sale of $174.4 billion more in stocks than have been purchased from Oct. 1, 2022 to March 31, 2025, which includes $1.494 billion in net-selling activity in the most recent quarter.
While some investors have postulated that Buffett is leaving soon-to-be Berkshire Hathaway CEO Greg Abel with the mother of all treasure chests upon his departure, the more likely reason behind this selling activity and Berkshire's record cash pile of nearly $348 billion is that stocks are pricey and finding a good deal is becoming difficult.
Warren Buffett Indicator hits 193% and has returned to its 2nd highest level of all-time 🚨🚨 pic.twitter.com/4hEya5COfa
-- Barchart (@Barchart) May 21, 2025
In an interview with Fortune magazine in 2001, Buffett described the market cap-to-GDP ratio as "probably the best single measure of where valuations stand at any given moment." This measure, which has come to be known as the "Buffett Indicator," aggregates the value of all U.S. publicly traded companies and divides that figure by U.S. gross domestic product (GDP).
When back-tested to 1970, the Buffett Indicator has averaged a reading of around 85%. In other words, the cumulative value of all public stocks in the U.S. has equated to roughly 85% of U.S. GDP. In mid-February, when the benchmark S&P 500 hit its all-time high, the Buffett indicator peaked at more than 205%! Following the recent bounce back in equities from their shortly lived crash in April, the Buffett Indicator is, again, approaching 200%.
It's a similar story with the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio). When back-tested 154 years, the Shiller P/E has averaged a reading of a little over 17. It's currently hovering at a multiple of around 36 and hit a peak of almost 39 in December 2024.
Valuation is so important to Buffett that he's stopped buying shares of his favorite stock, Berkshire Hathaway, cold turkey. Following 24 consecutive quarters of share repurchases totaling nearly $78 billion, Berkshire's chief hasn't bought back shares of his company's stock for three straight quarters. Over the last three quarters, Berkshire's stock has traded at a 60% to 80% premium to book value, which is up from a relatively consistent range of 30% to 60% above book from mid-2018 to mid-2024.
Value is of paramount importance to Warren Buffett -- and this market offers very little in the way of value at the moment.
Image source: Getty Images.
Warren Buffett has made a living by pouncing on inevitable price dislocations
While these four words in the Oracle of Omaha's annual shareholder letter point to the inevitability of future downside at some point for Wall Street's major stock indexes, it also speaks to the promise of locating unique opportunities.
The full context of Buffett's warning to Wall Street offers a rather optimistic long-term tone:
Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities. Greg [Abel] has vividly shown his ability to act at such times as did Charlie [Munger].
In other words, while nothing is tickling the fancy of Buffett or his top advisors at the moment, inevitable price dislocations will eventually come along that allow Berkshire's capital to be put to work at advantageous prices.
One of the most-famous examples of price dislocations representing a (in-hindsight) surefire buying opportunity for Buffett is Bank of America (BAC 2.30%).
Following the Great Recession, many of America's money-center banks were reeling. They were dragged down by poor-quality mortgage loans and credit delinquencies. Bank of America also had the dubious honor of paying more in fines than any other U.S. money-center bank after the financial crisis. Buffett viewed this moment of weakness in a long-standing, brand-name institution as a buying opportunity.
In August 2011, he infused BofA with $5 billion in capital to effectively shore up its balance sheet. In return, Berkshire Hathaway received $5 billion worth of Bank of America preferred stock that yielded 6% annually. But this wasn't the real prize.
In addition to generating $300 million in annual dividend income from BofA preferred shares, Berkshire received warrants to purchase up to 700 million shares of BofA common stock at an exercise price of $7.14 per share. By mid-2017, BofA stock had fully recovered and Berkshire Hathaway exercised the full allotment of its warrants. This banked Buffett and Berkshire's shareholders an instant (unrealized) profit.
Inclusive of U.S. Treasuries held, Buffett's company had $347.7 billion at its disposal, as of March 31. When price dislocations emerge, there will be more than enough dry powder at the ready for Warren Buffett, or his successor, Greg Abel, to strike with confidence. It's a strategy that's worked exceptionally well for decades, and there's no reason to believe it won't long after Buffett's departure as CEO.
