Warren Buffett’s Quiet $168 Billion Stark Message for Wall Street Demands Attention

Warren Buffett’s Quiet 8 Billion Stark Message for Wall Street Demands Attention

For almost six decades, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett has been take a tour of Wall Street’s benchmark stock indexTHE S&P500 (INDEXSNP: ^GSPC). While the S&P 500 has generated an overall total return, including dividends, of approximately 34,200% since the mid-1960s, the Oracle of Omaha has overseen an astonishing 5,074,030% overall increase in Class A stocks of her company (BRK.A) since she became CEO.

Although they are as fallible as any other investor, Warren Buffett and his investment team have demonstrated the ability to find amazing values ​​hidden in plain sight. He and his team generally look for companies with sustainable competitive advantages and rock-solid management teams.

Warren Buffett’s Quiet 8 Billion Stark Message for Wall Street Demands Attention

Warren Buffett, CEO of Berkshire Hathaway. Image source: The Motley Fool.

Due to the Oracle of Omaha’s resounding success as a money manager, both professional and everyday investors tend to benefit from its large gains. Forms 13F filed quarterly with the Securities and Exchange Commission allow investors to see what Buffett and his associates bought and sold.

But sometimes, it’s the actions not taken that speak the most.

Warren Buffett’s blatant warning to Wall Street: $168 billion

About a month ago, Berkshire Hathaway reported its fourth-quarter and full-year 2023 results. It was business as usual for Omaha-based Oracle, with operating profit up by approximately $6.5 billion to $37.4 billion from the prior-year period. Although Berkshire is best known for its $376 billion investment portfolio containing 45 stocks and two index funds, it also owns about five dozen companies, such as insurer GEICO and railroad BNSF, which n stopped growing over time.

But perhaps what stands out most from Berkshire Hathaway’s quarterly report is what didn’t happen.

In each of the last five quarters (starting October 1, 2022), Buffett and his investing “lieutenants,” Ted Weschler and Todd Combs, have been net sellers of stocks. In other words, they sold more shares than they bought over the past 15 months, totaling almost $39 billion.

Generating positive cash flow from operations, coupled with being a consistent net seller of stocks, has allowed Berkshire Hathaway to grow its cash position to a record high of $167.6 billion.

Generally speaking, a large cash reserve is viewed favorably by the investment community. Having plenty of cash gives most companies enviable financial flexibility when it comes to innovation, capital returns, and acquisitions.

But Berkshire Hathaway is no ordinary company. Buffett and his team have for decades relied on Berkshire’s capital investment to supplement operating profit growth and generate investment gains. In short, the rapid increase in cash suggests that Warren Buffett does not find any companies attractive to invest his company’s capital. This reluctance to grow his company’s capital is a silent warning that investors should not ignore.

Stocks are historically expensive

While the Oracle of Omaha would never bet against America, Berkshire’s growing liquidity suggests it won’t bet on stocks either if the valuation isn’t right.

Although there is no shortage of ways to analyze valuations on Wall Street, the Shiller price-to-earnings (P/E) ratio of the S&P 500, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), is one of the best.

Instead of using earnings over the past 12 months, as is the case with the traditional P/E ratio, the Shiller P/E is based on inflation-adjusted average earnings over the past 10 years. Looking at a decade of inflation-adjusted earnings eliminates one-off events (e.g., the COVID-19 pandemic) that can distort traditional valuation analysis.

S&P 500 Shiller CAPE ratios chartS&P 500 Shiller CAPE ratios chart

S&P 500 Shiller CAPE Ratios Chart

When tested back to 1871, the S&P Shiller’s P/E ratio averaged a modest multiple of 17.1. As of the close of March 20, 2024, the Shiller P/E of the S&P 500 was just below 35. This is one of the highest numbers in history during a bull market.

But what’s remarkable is what has happened throughout history whenever the Shiller P/E has risen above 30 and held that mark for a notable period of time. In the five previous cases, this dates back to 1871, the Dow Jones Industrial Average or the S&P 500 ultimately lost between 20% and 89% of its value. The important thing to remember is that valuations are still extended, Ultimatelyreturns closer to the average.

To be honest, the Shiller P/E ratio is not a timing tool. For example, it stayed above 30 for four years, between 1997 and 2001, before the dot-com bubble damaged highly valued growth stocks. Just because it’s close to 35 now doesn’t mean a stock market slowdown is expected in the near future. But history suggests that an eventual bear market fade awaits.

Although Buffett has not chosen any specific valuation tool for stocks, his latest annual letter to shareholders notes that “for some reason, markets now exhibit much more casino-like behavior than when I was young”. A renowned investor describing the stock market as a “casino” suggests that value is extremely difficult to find right now.

A businessman carefully reading a financial newspaper. A businessman carefully reading a financial newspaper.

Image source: Getty Images.

Patience and perspective will always trump market timing

Despite the Oracle of Omaha’s frankness about Wall Street’s “casino,” Warren Buffett has also been clear repeatedly throughout his tenure as CEO of Berkshire Hathaway that he would never bet against America . Buffett understands better than most investors that patience and perspective matter far more than trying to anticipate short-term directional moves in stocks.

For example, economic downturns and recessions are part of the normal business cycle. Although Buffett and his investment team are fully aware that a U.S. recession will materialize at some point in the future, they understand that there is a much greater incentive to bet on economic expansion.

Since the end of World War II, there have been a dozen recessions in the United States, nine of which resolved in less than a year. The other three did not exceed 18 months. In comparison, most growth periods lasted several years, with two expansions exceeding the 10-year mark. Although skeptics are sometimes right, betting on the steady long-term expansion of the U.S. economy and its underlying businesses has proven to be a winning formula.

This imbalance between the duration of expansions and recessions is also visible in the stock market. Although stocks do not reflect the performance of the U.S. economy, company profits generally fluctuate with the health of the economy.

Last June, researchers at Bespoke Investment Group released a dataset examining the duration of each S&P 500 bear and bull market since the start of the Great Depression in September 1929. In total, 27 distinct bear and bull markets have been analyzes.

What Bespoke data showed was that the average bear market lasted 286 calendar days, or about 9.5 months. On the other hand, a typical bull market has lasted 1,011 calendar days over the past 94 years, about 3.5 times longer than an average bear market. In fact, 13 of the 27 bull markets studied by Bespoke lasted longer than the longest bear market.

Buffett’s growing cash pile is a clear but silent admission that neither he nor his team see much value. But that doesn’t mean Buffett has abandoned America or the stock market that brought him and his shareholders immense wealth.

For more than half a century, Buffett has used Berkshire’s treasure chest as a tool to scoop up generational values ​​at bargain prices. While no one knows when this opportunity will present itself next or what stocks will pique the interest of the Oracle of Omaha and his investment wizards, it is a real certainty that at some point in the future, a A significant portion of Berkshire’s $168 billion cash pile will be put to use.

Should you invest $1,000 in Berkshire Hathaway right now?

Before buying Berkshire Hathaway stock, consider this:

THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Berkshire Hathaway wasn’t one of them. The 10 selected stocks could produce monster returns in the years to come.

Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor The service has more than tripled the performance of the S&P 500 since 2002*.

See the 10 values

*Stock Advisor returns March 21, 2024

Sean Williams has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

Warren Buffett’s Silent Warning to Wall Street of $168 Billion Should Not Be Ignored was originally published by The Motley Fool

Source Reference

Latest stories