Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has been sounding the alarm about the stock market’s “casino-like” behavior. In 2024, Buffett and his team stockpiled more cash than ever before, with over $320 billion in cash and cash equivalents and short-term U.S. Treasury bills at the end of the third quarter. Berkshire also sold way more stock than it bought, including big sales of its two largest positions: Bank of America and Apple.
Through the first nine months of 2024, Berkshire only purchased $5.8 billion in equity securities while selling $133.2 billion. Buffett looks at the ratio of stock market capitalization to gross domestic product (GDP) to see if the stock market is undervalued or overvalued. This figure recently surpassed 200%, suggesting the market is overvalued.
However, there is a silver lining. Since mid-December, Berkshire has been buying stocks again, pouring into several companies like Occidental Petroleum and Sirius XM Holdings. Even though these were additions to existing positions, the buying activity suggests Buffett and his team still see opportunities in the current market.
Market breadth was poor last year as a few dozen high-flying tech and artificial intelligence stocks carried the market. In 2024, 174 stocks in the S&P 500 ended the year in the red, while 348 stocks underperformed the benchmark’s 23% gain. All of Berkshire’s recent purchases vastly underperformed the index last year and have forward price-to-earnings ratios (P/E) under 25.
Buffett cautions against speculative investing
This is a reminder to investors that there are always opportunities, especially with value stocks that may be more insulated to any market sell-off since investors already have low expectations. Buffett has also criticized online trading apps for encouraging quick-profit speculation, which he believes could potentially lead to market panics.
He attributed the rise in speculative investing to the democratization and gamification of trading, facilitated by online trading applications. Buffett’s insights reflect the changing dynamics of investing in the digital age. While online trading platforms have increased accessibility, they have also led to a surge in speculative investing, which could result in significant market fluctuations and potential losses for those not conducting proper research.
In a recent interview, Joel Greenblatt highlighted Buffett’s insightful analogy that compares investing in stocks to owning businesses. Greenblatt explained that if someone sold a business, analyzed local businesses, and prudently invested in eight well-researched companies, it would be seen as a sensible decision. However, when applying the same logic to stocks, people often perceive it as risky due to daily price volatility and market perceptions.
Greenblatt emphasized that concentrating investments in well-researched opportunities is rational, whether in stocks or businesses. He challenges the stigma against focused stock investing by reinforcing Buffett’s perspective on the matter. Buffett’s advice serves as a crucial reminder for investors to maintain discipline and focus on the long-term value of their investments.
As Greenblatt points out, investing in well-researched businesses, whether through stocks or direct ownership, is a prudent approach that should not be overshadowed by short-term market fluctuations.
