Warren Buffett sends a $300 billion warning to stock investors

Warren Buffett has 70 years of experience producing market returns for anyone willing to invest with him.

Buffett Partnership Ltd. produced an annual return of 31.6% from 1957 to 1968, while Dow Jones Industrial Average compounded at a rate of 9.1%. Eventually he folded the BPL in Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)which he took over in 1965, continuing to produce profits that left the rest of the market in the dust. Through 2023, Buffett’s has grown the value of Berkshire’s stock at an average rate of 19.8%, compared to 10.2% for S&P 500 during that period.

So when Buffett makes an investment decision, the whole world pays attention. Buffett has made several important decisions in recent quarters regarding Berkshire’s investment portfolio. All of this adds up to a significant warning for equity investors, indicating that there isn’t much to like in the stock market right now.

Buffett’s amassed a cash and treasury bill position that approached $300 billion in the third quarter. There are several factors pushing Buffett’s cash position to new records. Here’s how we got here and what it means for investors.

Buffett can’t stop selling stocks

Buffett has sold more stocks than he bought in each of the last seven quarters. The Oracle of Omaha made the largest stock sale in history last quarter when it cut Berkshire’s position in Apple (NASDAQ:AAPL) with about half the remaining stake, or about $73 billion. Total stock sales in the first half of 2024 were $97 billion, while he only made $4.3 billion in new purchases.

The stock sales just keep on coming. While we don’t have final Q3 numbers yet, Securities and Exchange Commission filings indicate that Buffett sold a large portion of Berkshire’s investment in Bank of America (NYSE: BAC). By September 24, he had sold $9 billion worth of stock.

Buffett said the decision to sell parts of Berkshire’s investments in stocks such as Apple or Bank of America is based on the idea that corporate tax rates will rise when the current tax law expires at the end of next year. Berkshire has huge unrealized capital gains on both stocks, which have grown considerably from Berkshire’s original purchase prices from 2016 to 2018.

But Buffett’s decision to sell also implies that he believes those stocks are trading near or above their intrinsic value. If they believed they were undervalued, they would be willing to pay higher fees later to own an undervalued asset today.

This sentiment may largely explain why Buffett has been less active on the buying side of the portfolio as well.

The story continues

Buffett doesn’t even buy his favorite stocks

Buffett’s favorite stock to buy in recent years has been, by far, Berkshire Hathaway. He has been steadily buying back shares of the stock since the board updated the buyback authorization in 2018. Buffett now has the opportunity to buy back shares whenever he believes the stock price is below its intrinsic value.

But buybacks in the last quarter slowed to a snail’s pace, totaling just $345 million. In June, Buffett chose not to buy any stocks at all. And based on Berkshire’s July filings, it doesn’t appear to have done any share repurchases to start the third quarter. Given that Berkshire’s shares have since mostly traded well above the levels they traded at in June and July, Buffett is unlikely to make any significant buybacks in Q3.

Another favorite stock of Buffett’s in recent years is Occidental Petroleum (NYSE: OXY). Buffett has been invested in the oil and gas company since 2019, when he purchased $10 billion in the company’s preferred stock. He went on to buy 29% of the company’s common stock, which means he must file a statement with the SEC whenever he buys or sells company stock. But no such revelations have materialized since June. That’s despite the stockpile falling to new lows amid falling oil prices.

The money adds up quickly

With $9 billion in gross stock sales from Bank of America alone during the quarter and limited capital deployed for new stock purchases or buybacks, Berkshire’s cash position is growing rapidly. At the end of the second quarter, Buffett already had $277 billion in cash and Treasuries.

When you add operating cash flow from Berkshire’s core operations of about $10 billion plus interest earned on Berkshire’s existing treasury holdings, the cash position at Berkshire could easily exceed $300 billion. The only factor that could prevent him from reaching that milestone is the estimated tax bill he had to pay this quarter for Buffett’s huge stock sales earlier this year.

Right now, cash and treasury are approaching 50% of Berkshire Hathaway’s investable assets. That’s before including the $169 billion in insurance available for investment.

Buffett shows a clear preference for safe assets and doesn’t even like his own company’s valuation right now. The warning is clear for stock investors: There’s not much to like about the stock market — at least, not for Berkshire Hathaway’s portfolio.

Should you follow Buffett’s lead?

Remember, most people don’t manage a $600 billion investment portfolio. It is more difficult to handle a large ship than to drive a small motor boat. Buffett also has the challenge of producing above-market returns for shareholders. What is the value of buying Berkshire Hathaway stock if investors could actually get the same returns from an S&P 500 index fund?

That means a lot of the large-cap stocks that make up Berkshire Hathaway’s investable universe are unattractive at current prices. This could even include Berkshire Hathaway stock. Buffett’s lack of recent stock buybacks suggests at least as much.

But the investment universe is much larger for individual investors. Smaller stocks look particularly attractive from a valuation perspective and could benefit from future interest rate cuts and increased money supply over the next few years.

While investors should not ignore Buffett’s warning, it is important to understand the implications. Just because Buffett doesn’t have a lot of great investment options right now doesn’t mean smaller investors can’t put their money to work in the stock market.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Warren Buffett Sends $300 Billion Warning to Stock Investors was originally published by The Motley Fool