Warren Buffett, the CEO of Berkshire Hathaway, has been selling large amounts of stock recently. In the first three quarters of 2024, his company sold $133 billion worth of shares in other companies. This is much more than the $6 billion of stock that it bought during the same time.
As a result, Berkshire Hathaway now has a lot of cash. At the end of September last year, it had $325 billion in cash and short-term investments. This is a big increase from the $168 billion it had at the end of 2023.
Buffett said one reason for selling so much stock is the possibility of higher capital gains taxes in the future. But there could be another reason. Having such a large amount of cash could be a warning sign that Buffett is worried about how expensive the stock market is right now.
One way to measure the value of the stock market is the CAPE ratio.
Buffett’s significant stock liquidation
It compares the price of stocks to the average earnings of companies over the past 10 years, taking inflation into account.
Right now, the CAPE ratio is 37.9. This is much higher than the historical average of 17.2.
In the past, when the CAPE ratio was high, it often meant that stock returns would be lower in the following years. Buffett and Berkshire Hathaway could be telling investors to be more careful with their investments. However, there are other factors to consider.
The amount of money in the financial system (called M2 money supply) has doubled in the past 14 years among major economies like the U.S., Europe, China, and Japan. More money can lead to higher prices for things like stocks, real estate, and even cryptocurrencies. Also, more people are investing in index funds that buy stocks no matter what the price is.
This could keep stock prices high even if they seem expensive based on traditional measures. In the end, it’s hard to predict what will happen in the markets, even for someone as successful as Warren Buffett. The smartest thing for most people is to keep investing regularly for the long term, even if there are ups and downs along the way.
