Warren Buffett’s $9 billion warning to Wall Street has become deafening

There is probably no investor on the planet who commands as much attention on Wall Street as Warren Buffett, CEO of Berkshire Hathaway (BRK.A 0.42%) (BRK.B 0.72%). The reason investors hang on every word of the aptly named “Oracle of Omaha” is because he crushed S&P 500 over a period of almost six decades.

Since becoming CEO of Berkshire Hathaway in the mid-1960s, Buffett has overseen a cumulative return on his company’s Class A shares ( BRK.A ) that comfortably exceeds 5,400,000 percent. By comparison, the S&P 500 has gained about 38,000%, including dividends paid, over the same time frame. While this is a very respectable return in its own right, doesn’t hold a candle to Buffett’s investment prowess.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Each quarter, investors eagerly await Berkshire Hathaway’s Form 13F filing with the Securities and Exchange Commission (SEC). This is a must-have filing for institutions and large-scale investors with at least $100 million in assets under management that provides a snapshot of stocks bought and sold over the past quarter. A 13F allows investors to effectively mirror Buffett’s buying and selling activity (after the fact).

As investors predominantly look to Berkshire Hathaway’s 13F and SEC filings for ideas on which stocks to buy, Warren Buffett’s now-obvious warning to Wall Street has become absolutely deafening.

One of the most optimistic investors on Wall Street is a decisive seller of stocks

Whether written in his annual letter to shareholders or delivered during Berkshire Hathaway’s annual shareholder meetings, Warren Buffett’s message to the investment community has consistently been one of positivity and patience. He has frequently opined that investors should never bet against America, which is why you won’t see him or his investment lieutenants, Ted Weschler and Todd Combs, shorting stocks or buying put options.

However, Buffett’s optimism is not blind. While he fully understands that economic cycles are not linear and the US economy spends a disproportionate amount of time expanding relative to contracting, he is unwilling to pursue larger stocks unless he sees value or simply cannot locate that… bargains of a day.

Over the last seven quarters (October 1, 2022 to June 30, 2024), Buffett was a decisive net seller of $131.6 billion worth of stocks. Although Berkshire will not file its 13F with the SEC for the quarter ending in September until November 14, the SEC Form 4 provides strong evidence that this net sales activity will continue for the eighth consecutive quarter.

On September 24, Buffett’s company filed a Form 4 showing that about 21.56 million shares of Bank of America (BAC -0.30%)worth approximately 862.7 million dollars, were sold.

However, this sale of Berkshire Hathaway’s third-largest holding by market value was not an isolated incident. Since July 17, Buffett has sold shares of Bank of America during 33 separate trading sessions, with the cumulative market value of those sales approaching $9 billion. A position that was once over 1.03 billion shares held was reduced to 814.35 million shares as of September 24th.

Simple profit-taking may be the reason behind this 21% reduction in Berkshire’s stake in Bank of America over the past 10 weeks. Buffett offered his opinion during Berkshire’s annual shareholder meeting in early May that corporate tax rates could rise in the future. Therefore, locking in sizable unrealized gains now is something investors can look back on and appreciate years down the road.

But there may be something far more ominous behind Buffett’s $9 billion total sales of BofA stock.

Image source: Getty Images.

Stocks exceptionally expensive and unattractive amid Wall Street’s ‘casino-like behavior’

Let me preface what I’m about to say by reminding you that Warren Buffett is an unabashed long-term optimist. He is a strong believer in the US economy and realizes that Wall Street bull markets last considerable more than bear markets. This is why it is constantly on the lookout for price dislocation in time-tested businesses with well-defined competitive advantages.

Despite this unwavering long-term optimism for the U.S. economy and stock market, what Buffett does with Berkshire Hathaway’s money in the shorter term won’t always line up perfectly with what he preaches. As Buffett himself said, “Price is what you pay. Value is what you get.”

As a deeply rooted value investor, the Oracle of Omaha will not overpay for the stock. He will simply sit on his proverbial hands and wait for the next emotional event to create price dislocations that he can take advantage of.

Right now, the stock market is at one of the most expensive valuations in history!

While there are a number of measures of “value,” and value is ultimately a subjective term, the S&P 500’s Shiller price-to-earnings (P/E) ratio does a particularly good job of illustrating how overvalued the current valuation is for stocks. The Shiller P/E ratio is also known as the cyclically adjusted price-to-earnings ratio or the CAPE ratio.

S&P 500 Shiller CAPE Ratio data by YCharts.

The Shiller P/E, which is based on average inflation-adjusted earnings over the past 10 years, closed on Sept. 24 at nearly 37. That’s the third highest during a continuous market that dates back to January 1871 and is more than double its average reading dating back more than 150 years.

In the past 153 years, there have been only six occasions, including today, when the S&P 500’s Shiller price/earnings ratio has exceeded 30 during a bull market rally. Following the previous five instances, the S&P 500 and/or Dow Jones Industrial Average they eventually lost between 20% and 89% of their value. While the moment when the music will stop is impossible for investors to make, the lesson history provides is that stock valuations do not remain stretched indefinitely.

Investing based on emotions doesn’t help either. In Buffett’s latest annual letter to Berkshire Hathaway shareholders, he warned of the “casino-like behavior” now prevalent on Wall Street. Years of historically low interest rates, coupled with easy access to information, have encouraged some retail investors to seek volatility. This certainly flies in the face of Buffett’s long-term ethos, which he promotes by purchasing an exorbitant amount of his own company’s stock.

While Buffett won’t sit on the sidelines forever, he is steadfast in his desire to get perceived value from his investments. Until price dislocations become too tempting to ignore, we can see the Oracle of Omaha reducing key positions like Bank of America and building Berkshire’s $277 billion war chest.