Warren Buffett, the CEO of Berkshire Hathaway, has been closely watched by investors for his impressive track record. The company’s stock has grown at a 19.8% annual rate from 1965 to 2023, beating the broader market. However, recent moves by Buffett have raised concerns.
In the first three quarters of 2024, Berkshire sold $133 billion worth of shares in other companies, including Bank of America. This is much higher than the $6 billion of stock it purchased. As a result, the company’s cash position has increased significantly.
As of Sept. 30, Berkshire had $325 billion in cash, cash equivalents, and short-term investments on its balance sheet, up from $168 billion at the end of 2023. Buffett cited the possibility of higher capital gains taxes as a reason for taking profits.
Buffett’s cautious market signals
However, selling a large amount of stock and building up a massive cash pile could also be a warning that he is worried about the current stock market valuation. The CAPE ratio, a widely followed valuation tool, adjusts the traditional price-to-earnings ratio for inflation and uses the average of the previous 10 years’ earnings.
The CAPE ratio has a high inverse correlation with forward returns. Currently, the CAPE ratio is at 37.9, rarely higher in its 150-year history and a 120% premium to its average of 17.2. This suggests that the market is overvalued, and Buffett may be adopting a more cautious approach. However, the soaring valuation of the S&P 500 doesn’t necessarily mean poor returns.
The M2 money supply among the four major economies (U.S., Europe, China, and Japan) has doubled in the past 14 years, which can promote higher asset prices. Additionally, the rise of passive investing means investors continue to buy stocks regardless of valuation. While taking cues from Warren Buffett can be wise, making accurate predictions is difficult, especially when market and economic dynamics shift.
It’s still smart to invest early and often, with a long-term mindset. Investors should remain informed and consider multiple factors before making investment decisions.
