Finance
Warren Buffett just sent a $277 billion warning to stock investors
Warren Buffett is considered one of the greatest investors of all time, and he has the track record to prove it. He took Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) from a struggling textile company in the 1960s to a giant conglomerate now worth $900 billion, by buying highly valuable companies at a fair price. Since Buffett took over the company, Berkshire Hathaway’s stock value has grown at an average compound annual rate of 19.8%, well above the 10.2% yielded by the U.S. economy. S&P500 during the same period.
Buffett controls virtually Berkshire’s entire stock portfolio and manages the company’s cash position. But last quarter was the biggest warning yet that Buffett doesn’t see much to like in today’s stock market. That’s reflected in Berkshire’s cash and government bond holdings, which rose to $277 billion in the second quarter, up $88 billion from the previous quarter.
Here’s how Berkshire got here and what it means for investors.
Buffett just made his biggest stock sale in history
Buffett sold more than $77 billion worth of shares in the second quarter. That easily surpasses the amount Buffett has ever sold in a given year, let alone in a single quarter. With just $1.6 billion in stock purchases last quarter, that’s seven straight quarters in which Buffett has been a net seller of stocks.
By far the biggest stock sale was Buffett’s decision to trim Berkshire’s position Apple (NASDAQ: AAPL). At one point, Apple accounted for almost 50% of Berkshire’s entire portfolio. However, as of June 30, Berkshire’s Apple shares were worth $84.2 billion, or 29.5% of the company’s equity investments. That represents a sale of about half of Berkshire’s Apple shares in the last quarter.
That is the third quarter in a row Buffett has reduced his stake in Applea company that he called “a better company than any company we own” at last year’s shareholders meeting. He explained his reasoning behind the sales at the most recent shareholders meeting. He views the current tax law for businesses as very favorable, and he is willing to pay taxes now so he can avoid higher taxes later. Berkshire is enjoying a huge capital gain from its Apple investment.
Buffett has also reduced another top position since the end of the quarter: he has sold $3.8 billion worth of shares. Bank of America (NYSE: BAC) stock since mid-July. Berkshire is also making significant gains on these stocks.
That said, it’s one thing to strategically use capital gains to ensure a low tax rate. But Buffett could immediately reinvest that money (minus the estimated tax bill) if he saw a good opportunity in the market. He could even buy back the shares he sold immediately, without any penalty, as the wash sale rule does not apply to capital gains, but only to capital losses.
Even Buffett’s tendency to buy one particular stock month after month seems to have disappeared in today’s market.
Buffett bought this stock for 24 months straight… and then stopped
Although Buffett has consistently sold more shares than he bought over the past nearly two years, there is one stock he uses Berkshire’s extra cash to buy every month: Berkshire Hathaway’s own stock.
Berkshire revamped its stock buyback program in mid-2018, allowing Buffett to buy back shares when he believed they were trading below their intrinsic value. Since then, Buffett has only taken a few months off from buying Berkshire stock.
However, in June, Buffett did not repurchase shares of either share class for the first time since May 2022. Additionally, share repurchases for the entire quarter totaled a paltry $345 million. This is the smallest amount since the change in the buyback permit in 2018.
Despite the enormous amount of money he has spent on buying back Berkshire stock in recent years, Buffett remains very strict when it comes to stock buybacks. “All share buybacks must be price dependent. What is sensible at a discount to corporate value becomes foolish when done at a premium,” he wrote in his 2023 letter to shareholders.
That suggests that Buffett doesn’t even think his own company’s stock is a good value these days. With nowhere attractive to invest the money, Berkshire’s cash and government bond holdings will continue to grow.
What it all means for investors
While Buffett is always optimistic about the US economy in the long term, he doesn’t seem to see many big investments in the stock market at the moment. Valuations are high and expected future returns do not look as good as in the recent past. Investors may have a hard time finding good value in today’s market, even after the recent pullback in stocks. Despite the recent sell-off, the S&P 500 is still trading at about the same level as in May.
That said, Buffett’s circumstances are very different from those of the average investor. He has a stock portfolio worth about $300 billion and another $277 billion in cash. That’s a huge portfolio to manage, severely limiting Berkshire’s options to a few large-cap stocks or a few large private companies.
The average investor has a slew of stocks to add to their portfolio. Small-cap stocks still look attractive. Or investors could buy a simple broad-based index fund, one of Buffett’s top recommendations for retail investors, and call it a day.
While investors shouldn’t ignore the warnings woven into Buffett’s latest moves, it’s also important to consider your alternatives. The stock market still seems to be the best way to grow your wealth in the long term.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions at Apple. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has one disclosure policy.
Warren Buffett just sent a $277 billion warning to stock investors was originally published by The Motley Fool
