Warren Buffett, as a famous American investor, holds a huge amount of cash and has not entered the US stock market. He and his investment team have been net sellers of US stocks for the past five quarters. Berkshire Hathaway, led by Buffett, has a massive cash reserve, reaching a historical high of $167.6 billion. Although he has always liked to invest in companies with competitive advantages and strong management teams, in the past 15 months, they have sold more stocks than they bought, totaling nearly $39 billion. Buffett's strategy is closely watched, and investors can learn about his buying and selling activities through the quarterly holdings reports submitted to the US Securities and Exchange Commission by Berkshire Hathaway
According to the financial news app Zhitong Finance, since the mid-1960s, the total return of the S&P 500 index has been around 34,200%, while "Stock God" Warren Buffett, since becoming the CEO of Berkshire Hathaway (BRK.A.US, BRK.B.US), has achieved an astonishing cumulative increase of 5,074,030% in the company's Class A shares.
He and his investment team typically look for companies that provide sustainable competitive advantages and have rock-solid management teams. Due to Buffett's tremendous success in fund management, both professional and ordinary investors tend to refer to his investment strategies. Investors can understand Buffett's buying and selling activities through the quarterly holdings report (13F) submitted by Berkshire Hathaway to the U.S. Securities and Exchange Commission (SEC).
But sometimes, not taking action is the best way to explain things.
Holding $168 billion in cash
About a month ago, Berkshire Hathaway released its performance for the fourth quarter of 2023. The company's Q4 operating profit increased by about $6.5 billion from the same period last year to $37.4 billion. While Berkshire Hathaway is most known for its $376 billion investment portfolio, which includes 45 stocks and two index funds, the company also holds stakes in around 50 businesses such as insurance company GEICO and railway company BNSF.
It is worth noting that in the past five quarters (starting from October 1, 2022), Buffett and his investment "lieutenants" Ted Weschler and Todd Combs have been net sellers of stocks. In other words, in the past 15 months, they have sold more stocks than they bought, totaling nearly $39 billion.
With positive cash flow from operations and being net sellers of stocks, Berkshire Hathaway's cash reserves have swelled to a historical high of $167.6 billion.
In general, having a large amount of cash on hand provides most companies with enviable financial flexibility in innovation, capital returns, and acquisitions.
However, Berkshire Hathaway is not an ordinary company. For decades, Buffett and his team have relied on using Berkshire's capital to supplement operating profit growth and drive investment returns. In short, the rapidly growing cash reserves indicate that Buffett has not found any worthwhile investment opportunities. His reluctance to deploy the company's capital is a silent warning that investors should not ignore.
U.S. stock valuations at historical highs
Although Buffett has claimed he will never short America, Berkshire's continuously growing cash reserves suggest that he will not bet on stocks if valuations are not appropriate.
While Wall Street has no shortage of valuation analysis methods, the Schiller Price-to-Earnings Ratio (P/E), also known as the cyclically adjusted P/E ratio (CAPE), is one of the best methods.
The Schiller P/E ratio does not use the earnings of the past 12 months like traditional P/E ratios but is based on the average earnings of the past 10 years adjusted for inflation. Inflation-adjusted earnings exclude one-time events that may affect traditional valuation analysis, such as the COVID-19 pandemicLooking back to 1871, the Schiller P/E ratio of the S&P 500 index averaged 17.1 times, which was not high. As of the close on March 20, 2024, the Schiller P/E ratio of the S&P 500 index was slightly below 35 times. This is one of the highest multiples during a bull market period.
Throughout history, whenever the Schiller P/E ratio exceeded 30 times and remained at this level for a long time, the stock market faced downside risks. Since 1871, the Dow Jones Industrial Average or the S&P 500 index has experienced this situation five times, with the stock market eventually falling by 20% to 89%.
However, the Schiller P/E ratio is not a timing tool. For example, between 1997 and 2001, this indicator stayed above 30 for 4 years, and then the dot-com bubble burst, hitting high-valuation growth stocks hard. Now, a Schiller P/E ratio close to 35 does not necessarily mean that the stock market will soon decline. But history does indicate that a bear market will eventually come.
Buffett stated in his recent annual letter to shareholders, "For whatever reason, the market is behaving in a way that I would say is more like a casino than not." When a prominent investor describes the stock market as a "casino," it indicates that it is difficult to find value at the moment.
Patience and foresight always beat market timing
Although Buffett bluntly points out the "casino" characteristics of Wall Street, he has repeatedly stated that he will never short America. Buffett understands better than most investors that patience and foresight are far more important than trying to predict short-term stock movements.
For instance, economic slowdowns and recessions are normal parts of the economic cycle. Since the end of World War II, the U.S. has experienced 12 economic recessions, with 9 of them resolved in less than a year. The remaining 3 did not exceed 18 months. In contrast, most expansion periods can last for several years, with 2 growth periods exceeding the 10-year mark.
This imbalance in the duration of economic expansions and contractions is also evident in the stock market. While the stock market may not reflect the performance of the U.S. economy, corporate earnings usually fluctuate with the health of the economy.
Data from Bespoke shows that bear markets on average last 286 calendar days, or about 9.5 months. On the other hand, over the past 94 years, a typical bull market has lasted 1,011 calendar days, roughly 3.5 times the average duration of a bear market. In fact, in Bespoke's study of 27 bull markets, 13 of them lasted longer than the longest bear marketAnalyst Sean Williams from The Motley Fool believes that Buffett's continuously growing cash reserves clearly but silently admit that he and his team have not seen too much value. However, this does not mean that Buffett is giving up on the U.S. stock market, which has brought him and shareholders tremendous wealth.
For over half a century, Buffett has been using Berkshire's funds to acquire high-quality companies at low prices. While no one knows when Buffett will make a move again, it is certain that at some point in the future, a significant portion of Berkshire's $168 billion cash reserves will be put to use