Buffet Provides 166 Billion-Dollar Worth of Reasons for Investors to Exhibit Fear during the Upcoming New Year
Every year, around 40,000 individuals visit Omaha for the chance to hear from Berkshire Hathaway's (BRK.A -0.39%, BRK.B -0.56%) CEO, Warren Buffett, discussing stocks and the U.S. economy. This investor gathering is driven by Buffett's remarkable outperformance sequence against the S&P 500 (^GSPC -1.11%) since he took on the CEO role six decades ago.
Buffett's control over Berkshire Hathaway's Class A shares (BRK.A) has yielded a stunning cumulative gain of 5,515,517% over the same timeframe as the S&P 500. Utilizing Berkshire Hathaway's quarterly Form 13F filings to mirror Buffett's trading activities has been a fruitful endeavor for decades.
However, heading into the new year, Buffett has given investors 166 billion reasons to be anxious.
Buffett has demonstrated a consistent two-year pattern of stock selling
Warren Buffett is famous for his quote, "Be fearful when others are greedy, and greedy when others are fearful." Although Buffett has consistently advocated for not betting against America, he is a value investor who is not afraid to wait for price discrepancies.
From his actions over the past two years, through the end of September, Buffett seemingly exhibits fear for what might transpire in the stock market. Specifically, for eight consecutive quarters (Oct. 1, 2022 to Sep. 30, 2024), his team sold more stock than they purchased:
- Q4 2022: $14.64 billion in net-equity sales
- Q1 2023: $10.41 billion
- Q2 2023: $7.981 billion
- Q3 2023: $5.253 billion
- Q4 2023: $0.525 billion
- Q1 2024: $17.281 billion
- Q2 2024: $75.536 billion
- Q3 2024: $34.592 billion
This amounts to $166.22 billion in net stock sales over two years, boosting Berkshire Hathaway's cash balance, including U.S. Treasuries, to over $325 billion. This runs contrary to the expectations of one of Wall Street's most respected long-term optimists.
The stock market is currently overvalued, and Buffett is finding it hard to find good deals
During Berkshire Hathaway's annual shareholder meeting in May 2024, Buffett hinted that his recent selling activities might be due to tax precautions. With Berkshire Hathaway having substantial unrealized gains from Apple and Bank of America (BAC -0.47%), and the corporate income tax rate at its lowest level since 1939, Buffett observed that locking in some gains would be viewed favorably by Berkshire's shareholders.
However, there might be more to this selling than just tax planning. Namely, the stock market is currently overvalued, and it's becoming increasingly challenging for Buffett to find an attractive deal.
The Buffett Indicator reached an all-time high of 209% in December 2024 🚨For context, it peaked at 140% before the Dot Com Bubble Burst.
Barchart (@Barchart) December 9, 2024**
In a 2001 Fortune magazine interview, Buffett referred to the market cap-to-GDP ratio as "probably the best single measure of where valuations stand at any given moment." This ratio soon gained recognition on the Street as the "Buffett Indicator" -- and it's recently made history.
Since 1970, the market cap-to-GDP ratio averaged around 85%. In October 2024, it surpassed 200% for the first time and reached an all-time high above 209% by dividing the Wilshire 5000 Index into U.S. GDP.
Although the Buffett Indicator isn't particularly helpful in determining when downturns will occur in the S&P 500 and other broad-market indexes, it has served as a warning of eventual downturns in the stock market. The Buffett Indicator hit 144% preceding the dot-com bubble burst, 107% prior to the financial crisis, 166% before the COVID-19 pandemic, and 195% before the 2022 bear market. These events were respectively followed by S&P 500 losses of 49%, 57%, 34%, and 28%, on a peak-to-trough basis.
It's evident that Buffett is securing gains ahead of 2025 while being cautious in a historically overpriced market. In addition, he has more than 5.5 million reasons for investors to remain optimistic.
According to Berkshire Hathaway's 13F filings over the last eight quarters, it's clear that Buffett and his top advisors, Todd Combs and Ted Weschler, aren't discovering many investment opportunities with potential value. However, this doesn't alter Buffett's long-term conviction of not betting against America and believing that outstanding businesses will continue to grow in value over time.
Despite Buffett's short-term actions not always aligning with the values he espouses, the gross gain of over 5,500,000% in Berkshire's Class A shares since he became CEO isn't an accident. It's a consequence of Buffett sticking to his principles and maintaining his reputation as a value-driven investor who seizes opportunities during market panics and instability.
Just after the financial crisis, Buffett invested $5 billion in Bank of America (BofA) to bolster its financial stability. While the preferred shares provided a robust 6% return ($300 million in annual dividend income), it was the options to acquire up to 700 million shares of BofA stock at $7.14 per share that proved highly profitable. When these options were fully exercised in mid-2017, it significantly increased Berkshire's wealth.
For several decades, Warren Buffett has capitalized on market discrepancies like this. Although a suitable opportunity may not be present at the moment, it's only a matter of time before Buffett and his team utilize a portion of Berkshire's growing cash reserves.
To echo Buffett's words in his 2009 letter to shareholders at the height of the financial crisis, "Huge chances show up infrequently. When it's raining gold, reach for a bucket, not a thimble."
Buffet's cautious approach to investing in overvalued markets is reflected in his significant stock sales over the past two years, totaling $166.22 billion. This strategy has resulted in a substantial increase in Berkshire Hathaway's cash balance overall.
Given the current high valuation of the stock market, Buffett might be finding it challenging to identify lucrative investment opportunities that align with his value-driven investing approach.
