Although the Oracle of Omaha is an unwavering optimist, his actions over the last two years tell a different story.
Few if any investors command attention on Wall Street quite like the aptly named “Oracle of Omaha,” Warren Buffett. Since taking over as CEO of Berkshire Hathaway (BRK.A 2.24%) (BRK.B 1.99%) in the mid-1960s, he’s led his company’s Class A shares (BRK.A) to a jaw-dropping cumulative return of roughly 5,470,000%, as of the closing bell on Oct. 3.
Buffett’s overwhelming success has earned him quite the following on Wall Street. Investors eagerly await the quarterly filing of Berkshire’s Form 13F to uncover which stocks he and his investing lieutenants (Todd Combs and Ted Weschler) have been buying and selling.
But there’s just one problem: Buffett has been doing a disproportionate amount of selling, relative to buying, over the last two years.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett’s long-term ethos doesn’t always mesh with his short-term actions
Make no mistake about it, Buffett is an unwavering optimist of both the U.S. economy and stock market. During Berkshire Hathaway’s shareholder meetings and in his annual letter to shareholders, he’s stated on multiple occasions that investors shouldn’t bet against America.
However, Buffett is also an ardent value investor. Even with the understanding that the major stock indexes rise in value over long periods, he has little interest in chasing even “wonderful companies” when their valuations are above historic norms.
Beginning in October 2022, Berkshire Hathaway’s brightest investment minds, led by Warren Buffett, began selling more securities than they were purchasing. Here’s how this net-selling activity worked out over a seven-quarter stretch, through June 30, 2024:
- Q4 2022: $14.64 billion in net-equity sales
- Q1 2023: $10.41 billion
- Q2 2023: $7.981 billion
- Q3 2023: $5.253 billion
- Q4 2023: $0.525 billion
- Q1 2024: $17.281 billion
- Q2 2024: $75.536 billion
Collectively, $131.63 billion more in stocks have been sold than purchased by Buffett and his team over this 21-month stretch. The unmistakable uptick in net-selling activity observed during the first-half of 2024 is a reflection of Buffett green-lighting the sale of more than 500 million shares of Berkshire’s top holding, Apple.
But this selling activity didn’t stop in the June-ended quarter. Although we’re still more than a month away from Berkshire Hathaway’s Form 13F filing for the third quarter, as well as the unveiling of its quarterly operating results, there’s a very high probability that Buffett has overseen an eighth consecutive quarter of net-selling activity.
The reason I say “very high probability” has to do with Form 4 filings from Berkshire Hathaway with the Securities and Exchange Commission (SEC). In instances where Berkshire holds a greater than 10% stake in a public company, it’s required to file Form 4 with the SEC to alert investors when shares are sold or purchased.
Between July 17 and Oct. 2, the Oracle of Omaha has overseen the sale of nearly 240 million shares of Bank of America (BAC 2.19%) which had, until recently, been Berkshire’s No. 2 holding by market value. This persistent selling of Bank of America stock is closing in on almost $9.8 billion in total value sent to the chopping block. Buffett and his team haven’t purchased $9.8 billion in securities in a single quarter in quite some time.
This eight-quarter streak of net-selling appears to foreshadow trouble to come for Wall Street.
Image source: Getty Images.
Warren Buffett is struggling to find value in a historically pricey stock market
To reiterate, you’re not going to find Buffett or his investing aides short-selling stocks or buying put options. He and his team strongly believe in the U.S. economy and stock market over extended periods. But with value hard to come by at the moment, Buffett has no qualms about sitting on his proverbial hands.
Though there are a lot of ways to measure value, and value is, in itself, subjective, the metric that shows just how pricey equities are as a whole right now is the S&P 500‘s (^GSPC 0.90%) Shiller price-to-earnings (P/E) ratio. You’ll commonly find the Shiller P/E referred to as the cyclically adjusted price-to-earnings ratio, or CAPE ratio.
While the traditional P/E ratio can be useful for quick valuation comparisons, it’s flawed in the sense that shock events can adversely impact its utility. For instance, trailing-12-month P/E ratios proved almost useless in the early stages of the COVID-19 pandemic when lockdowns were imposed in select states.
By comparison, the S&P 500’s Shiller P/E ratio is based on average inflation-adjusted earnings over the last 10 years. Examining 10 years’ worth of earnings history tends to smooth out shock events and leads to more accurate long-term value comparisons.
S&P 500 Shiller CAPE Ratio data by YCharts.
When trading ended on Oct. 3, the Shiller P/E ratio clocked in at 36.6. This is roughly 1% below its high for the current bull market rally, and is more than double the 17.16 it’s averaged, when back-tested 153 years.
There is some degree of explanation as to why the Shiller P/E has spent much of the last 30 years above its historic average. The advent of the internet democratized access to information for investors, and low interest rates for much of the last 15 years fueled risk-taking.
However, a Shiller P/E of almost 37 marks the third-highest reading during a continuous bull market dating back to January 1871. The only two times higher readings were observed — prior to the dot-com bubble bursting and in late 2021/early 2022 — were followed by S&P 500 losing around half and one-quarter of its value, respectively.
Widening the lens a bit further, the S&P 500 has eventually lost at least 20% of its value following all five prior instances where the Shiller P/E has topped 30 during a bull market. We may not know when these downturns will occur, but history is pretty conclusive that extended valuations aren’t sustainable.
While Buffett likely has his own set of valuation metrics he prefers, the S&P 500’s Shiller P/E makes it abundantly clear just how pricey the stock market is right now.
The Oracle of Omaha in no hurry to put his company’s $277 billion cash pile to work, and his actions over the last eight quarters speak volumes.
