Over the last two years, Warren Buffett has been sending Wall Street a message loud and clear – without saying a word. His approach is more cautious than ever and Berkshire Hathaway’s eye-popping $325 billion cash stockpile is the outcome of his latest strategy.
While investors have long emulated Buffett’s moves, his latest decisions have raised eyebrows. This caution speaks volumes for a man known for his optimism in the U.S. economy.
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For the past eight quarters, Berkshire Hathaway has been a net seller of equities, raking in $166 billion by off-loading massive amounts of stock, including longtime favorites, like Apple and Bank of America.
The scale of these sales is unprecedented, as it’s the first time since 2018 that Buffett hasn’t bought back any of Berkshire’s stock – a move that hasn’t gone unnoticed in the financial community. This stance hints at one thing: Buffett sees the market as significantly overvalued.
Much of this cash isn’t being reinvested in the stock market but rather parked in short-term U.S. Treasury bills. Thanks to high yields, these low-risk investments have earned Berkshire close to $10 billion.
Cathy Seifert, an analyst with CFRA, recently pointed out that Buffett’s reduction in Apple holdings is a prudent move, especially since Apple had grown into a massive chunk of Berkshire’s portfolio. However, this pivot to treasuries instead of stocks signals that Buffett sees limited bargains on Wall Street – a stance that echoes his famous “buy low” philosophy.
Still, some analysts feel Buffett’s caution could be a missed opportunity. Cash yields may fall if the Federal Reserve begins to ease interest rates, making equities more attractive. In that case, Berkshire’s heavy cash position could mean missed gains if the market rebounds.
However, Buffett has historically bet on patience, using downturns to scoop up undervalued assets. He believes a significant cash reserve gives Berkshire the agility to seize bargains if a market slump occurs.
The cyclically adjusted price-to-earnings (CAPE) ratio, also known as the Shiller P/E ratio, paints a clearer picture of the market’s current state. At above 36 – more than double its long-term average – this ratio indicates a market far above traditional valuations.
Historically, CAPE ratios over 30 have often preceded significant market drops, losing anywhere from 20% to nearly 90% of their value. To the seasoned investor, these figures might seem like a harbinger of turbulent times.
Beyond valuations, other economic indicators bolster Buffett’s cautious stance. The U.S. Treasury yield curve has remained inverted for a historic length, signaling potential trouble. Combined with a notable decline in the M2 money supply – the first of its kind since the Great Depression – the data hints at a possible downturn.
But if there’s one thing Buffett has proved over his career, it’s that patience pays off. He famously pounced on Bank of America in 2011, buying $5 billion in preferred stock at a time when the bank was struggling and recently sold $896 million of the stock.
Buffett’s moves might be unsettling for those used to his optimism, but they’re not without precedent. With its substantial cash pile, Berkshire Hathaway is primed to strike when the market offers better deals.
Buffett’s track record shows he’s no stranger to swooping in on “price dislocations,” as he calls them. For the Oracle of Omaha, waiting out high valuations is part of the plan.
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