Warren Buffett’s latest annual letter to Berkshire Hathaway shareholders contains a cautionary message about current market valuations. The renowned investor, known for his long-term optimism, bluntly states, “Often, nothing looks compelling.” These four chilling words signal Buffett’s discomfort with the broader market’s high equity valuations. Over the past nine quarters, from October 1, 2022, to December 31, 2024, Berkshire Hathaway has been a net seller of stocks.
In 2024 alone, the firm sold $134 billion worth of stocks, resulting in a cash pile exceeding $334 billion, including U.S. Treasuries. Various market indicators support Buffett’s concern. The “Buffett Indicator,” which divides the total market cap of all publicly traded U.S. companies by the U.S. gross domestic product (GDP), reached an all-time high of 207.46% on February 18, far surpassing the long-term average of 85%.
Similarly, the S&P 500’s Shiller P/E Ratio stood at 37.73 on February 24, with readings above 30 historically preceding significant market pullbacks. Some of Berkshire Hathaway’s core holdings have also become overvalued.
Buffett’s market caution
For instance, Apple, a top holding since 2016, traded at a P/E multiple above 39 as of February 24, much higher than its earlier valuations in the low teens. Given these expensive valuations, it’s unlikely that Buffett and his advisors will make significant new investments in the near future. However, Buffett reassured shareholders that the company focuses on equities, especially American ones.
Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in mostly American equities. However, many of these will have international operations of significance,” he stated. Buffett’s strategy emphasizes patience and value investing. He is averse to chasing overvalued companies and prefers to wait for valuations to become more reasonable.
This approach has historically benefited Berkshire Hathaway, as evidenced by the company’s extraordinary long-term performance. In conclusion, while Buffett’s latest message may seem bleak, it also reinforces his disciplined investment strategy that has stood the test of time. Investors should heed his cautious optimism and prepare for the possibility of continued market volatility.
Image Credits: Photo by Adam Śmigielski on Unsplash
