Warren Buffett, the CEO of Berkshire Hathaway, has been making some surprising moves lately. His company sold $133 billion worth of stocks in the first three quarters of 2024. This is much more than the $6 billion in stocks it bought during that time.
As a result, Berkshire’s cash pile has grown a lot. At the end of September last year, the company had $325 billion in cash and short-term investments. This is up from $168 billion at the end of 2023.
Buffett said one reason for selling so much stock was the possibility of higher capital gains taxes in the future. But there could be more to it than that. Selling so much stock and building up a big cash reserve could be a warning sign.
It might mean Buffett is worried about how expensive the stock market is right now. One way to measure this is with the CAPE ratio.
Buffett’s big cash pile increases
This looks at stock prices compared to the average earnings over the past 10 years, adjusted for inflation. Right now, the CAPE ratio is 37.9. That’s much higher than the historical average of 17.2.
In the past, when the CAPE ratio was very high, it often meant lower stock market returns in the following years. Buffett and Berkshire may be hinting that it’s a good idea to be more careful with investing right now.
They might be expecting disappointing performance from stocks in the near future. However, it’s not always that simple. The amount of money in the financial system has grown a lot in recent years.
This extra money can push asset prices higher, like we’ve seen with real estate and cryptocurrencies. Also, more people are investing in passive funds that buy stocks no matter what. This keeps money flowing into the market even when valuations are high.
In the end, Buffett’s decisions can give us clues about the market. But it’s still hard to predict exactly what will happen, especially as the economy keeps changing. The smart approach is usually to invest regularly for the long term.
