There's absolutely no denying it now -- there's a serious lack of attractive long-term investment opportunities. Per Berkshire Hathaway's (BRK.A +0.16%) (BRK.B +0.18%) recently released third-quarter numbers, the conglomerate is sitting on a whopping $381.6 billion worth of idle cash.
It marks the fifth consecutive quarter that Berkshire's CEO, Warren Buffett, has opted to keep more than $300 billion on the sidelines rather than investing it in still-rising stocks, with this hoard being the biggest of those five quarters in question. For perspective, that's more than the sum total value of all the stocks that Berkshire Hathaway currently owns, and roughly one-third of Berkshire's current market value.
And yes, this is a hint you should take. There are three very specific ways you'll want to begin taking Buffett's clear lead, in fact, before the end of this year. But first things first.
Too expensive for Buffett's tastes
What gives? Why is the usually bold Buffett willing to miss out on so much of this year's ongoing bullishness?
The most likely explanation is also the correct one. That is, while Warren Buffett usually isn't too worried about valuations (he's famously said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"), we're in a somewhat extraordinary situation. Namely, stocks as a whole are strangely expensive here.
Image source: Getty Images.
Numbers from FactSet tell some of the tale. That is, the S&P 500's trailing price/earnings ratio is just under 29 right now, while its forward-looking price/earnings ratio is currently a little over 23. Both are at more-than-decade highs.
So is the so-called Buffett Indicator comparing the total combined capitalization of all U.S.-listed stocks to the United States' gross domestic product (or GDP). As of the latest look, the former is roughly 120% above the latter, which is 70% above its long-term norm.
Sure, Buffett understands that a small handful of artificial intelligence-related technology stocks are almost single-handedly responsible for this steep valuation. He also knows it doesn't really matter. If and when these tickers stumble, their sell-offs are going to drag the rest of the market down with them. That's likely what he's waiting on, in fact, even if he's not explicitly saying as much.
You might want to consider taking his lead and making similar plans now, since making plans in the midst of a panic often leads to ill-advised decisions. If you don't know where to start, consider these three easy steps.
1. Start building your own cash hoard
First and foremost, you can take a cue from the Oracle of Omaha by doing precisely the same thing he's doing. That's amassing a huge pile of cash to put to work once the right opportunity appears. In other words, a major pullback.
This should be deliberate, too. That is to say, while you may be seeing your cash balance grow simply because you're selling some stocks and not yet replacing them with any new picks, that's not quite the right mindset.
You should be making a conscious point of building a sizable cash balance, specifically because you know a great buying opportunity is coming sooner or later. When you're thinking in these terms, you're less likely to put some cash into short-term investments that you may not actually want to wade into.
2. Make your long-term pick list now
Saving up some liquidity is only part of the equation, though. At the same time, now's the time to start thinking about the stocks you actually do want to own for the long haul.
You've likely got a list of names you're interested in already in the back of your mind, if not outright written down. Many of these may not be the sort of stocks you'd actually want to buy with a "forever" mindset, though -- the kind of holding that you own on faith that the underlying company will be able to thrive in a future you can't even see.
The perma-holdings you should earmark here and now are the stalwarts that have a long track record of success in good times and bad. Think Coca-Cola, American Express, and Apple, each of which is currently a Berkshire holding.
3. Start keeping tabs on the long-term chart of the S&P 500
Finally, start keeping a visual track of a long-term chart of the S&P 500. This typically isn't the kind of thing true buy-and-hold investors need to bother doing. Indeed, this practice is something most long-term investors might want to make a point of not doing, since it tempts you to try to time the market's ebbs and flows. (You can't -- at least, not consistently.)
That's not quite the point of doing it right now, though. Rather, the primary purpose of watching the S&P 500's long-term chart here is to help keep the market's enormous run-up since April -- and really, since the middle of 2022 -- in perspective. There's a good chance you'll want to dive back in too soon once the market finally starts to go through an overdue correction, if not an outright bear market. A chart will help you avoid falling into that trap.
Not an all-or-nothing matter
Now, don't read too much into the message. While Buffett's hesitance implies he sees some sort of serious repricing on the horizon, it's not like he's completely abandoning the market altogether. Berkshire Hathaway is still sitting on over $300 billion worth of equity holdings. You don't necessarily need to abandon all of your stocks, either. You should stick with your highest-quality long-term holdings, in fact, even knowing some of them could suffer a short-term setback in the foreseeable future.
Just don't be afraid to apply some of the Oracle of Omaha's obvious intuition to your investments as well. Berkshire's long-term market-beating track record speaks for itself.
