Where to Invest In the Market
Warren Buffett Recently Plowed Another $345 Million Into His Favorite Stock
But Here's Why It Could Spell Trouble for the Market
Warren Buffett, CEO of Berkshire Hathaway (BRK.A 0.61%) (BRK.B 0.75%), has long been revered for his value investing approach, turning the company into an investment powerhouse. Since taking the helm in 1965, Buffett has overseen an average annual return of 19.8%, transforming a $1,000 investment back then into an astonishing $44 million today. Investors closely monitor his actions, and recent filings reveal a wave of stock sales by Berkshire in the second quarter of 2024. Yet, amidst these moves, Buffett continued to buy one stock: Berkshire Hathaway itself, signaling a potential warning for the broader market.
Berkshire’s Caution in Q2: Massive Sales, Especially in Apple
In the second quarter of 2024, Berkshire Hathaway sold a significant portion of its stock holdings, including a massive reduction in its Apple stake. Apple, which at one point accounted for nearly half of Berkshire’s stock portfolio, saw a 49% reduction in Berkshire's position during Q2. Apple remains the conglomerate’s largest holding with 400 million shares, worth over $90 billion, but the sales reflect Buffett's broader market concerns rather than any issues with Apple itself.
The broader market, as measured by the S&P 500, is currently trading at high valuations. The Shiller price-to-earnings ratio indicates the S&P 500 is at double its historical valuation, raising alarms for value investors like Buffett. The sales of Apple shares, alongside reductions in positions in Capital One Financial, T-Mobile, and Louisiana-Pacific Corp, as well as the complete liquidation of Snowflake and Paramount Global stocks, suggest that Buffett is positioning Berkshire more defensively.
Berkshire is now sitting on a record $277 billion in cash and equivalents, a sign that Buffett is struggling to find attractive investment opportunities at reasonable prices in today’s market. His reluctance to deploy capital into new stocks highlights his concerns about elevated market valuations.
Why Buffett’s $345 Million Purchase of Berkshire Hathaway Stock is a Warning
Despite Buffett's cautious approach in Q2, he authorized $345 million in buybacks of Berkshire Hathaway shares. On the surface, this might not seem unusual. Since 2018, Berkshire has repurchased $77.8 billion worth of its own stock, more than double what it has spent on buying Apple shares. Buybacks reduce the number of shares outstanding, increasing the value for shareholders, and have been a favored method for Buffett to return capital.
However, the pace of Berkshire’s buybacks has slowed. The $345 million spent in Q2 was the smallest amount allocated to buybacks since Berkshire resumed its repurchase program in 2018. This deceleration raises questions. Given that Berkshire has $277 billion in cash, why isn't Buffett being more aggressive with buybacks or other investments?
It’s possible that Buffett believes Berkshire stock is becoming expensive. Trading near all-time highs and with a price-to-sales ratio of 2.44, which is 24% higher than its 10-year average of 1.97, Berkshire shares may no longer represent the value Buffett typically seeks. His preference to hold onto a record cash pile rather than investing it could be signaling that Buffett expects a market correction and is preparing to take advantage of lower valuations when the time comes.
What This Means for Investors
While Buffett doesn't claim to predict short-term market movements, his actions offer important insights. The significant stock sales and record cash reserves suggest that he sees few opportunities for value in today’s market. However, his philosophy remains unchanged: long-term investing in quality companies is the best strategy, regardless of short-term market fluctuations.
For regular investors, Buffett has consistently advocated investing in exchange-traded funds (ETFs) that track major indexes like the S&P 500. Adding to an ETF each month, even when the market appears expensive, can yield strong returns over time. Despite the high valuations today, historical patterns suggest that current prices may seem like a bargain in a decade.
Berkshire Hathaway itself holds a position in the Vanguard S&P 500 ETF, which has an ultra-low expense ratio of 0.03%, making it a cost-efficient option for investors. Consistent investment in such funds can help investors navigate market volatility and benefit from the long-term growth potential of the U.S. stock market.
Conclusion
Warren Buffett’s decision to pour another $345 million into Berkshire Hathaway stock while selling large portions of other holdings might raise a red flag for investors. With the stock market trading at historically high valuations, Buffett’s actions suggest a cautious outlook. His record cash pile of $277 billion indicates that he's prepared for potential market corrections and is waiting for better buying opportunities. For individual investors, following Buffett’s advice of steady investment in low-cost ETFs might be the best way to ride out periods of uncertainty and capitalize on long-term market growth.