Warren Buffett is one of the most well-respected portfolio managers in the world, and there's good reason for it. His track record speaks for itself.
Since taking control of Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) in 1965, he grew the value of shareholders' stakes by an average compound annual rate of 19.8% through 2023. By comparison, the S&P 500 produced a total compound annual return of 10.2% in that period. Berkshire's beating the market benchmark so far in 2024 as well.
Maintaining such a strong track record over such a long period doesn't come without some level of skill in managing a portfolio and downside risk. Berkshire's best years of outperformance typically come when the rest of the market fails to meet its average returns. And Buffett just sent one of his biggest warnings yet that he doesn't like what he's seeing in the stock market today.
After selling more of Berkshire's equity portfolio, including massive portions of its stakes in Apple (AAPL -1.32%) and Bank of America (BAC -0.47%), the company ended the quarter with a record $325 billion in cash and Treasury bills on its balance sheet. That's up $48 billion from last quarter.
Here's how Berkshire got here, and what it means for investors.
Image source: The Motley Fool.
Buffett made more massive stock sales
Buffett has been a net seller of stocks in each of the last eight quarters. And in the second quarter, he sold $36.1 billion worth of stock and bought just $1.5 billion. Among Buffett's biggest stock sales in that quarter were Apple and Bank of America.
Based on the data provided in Berkshire Hathaway's quarterly earnings, Buffett slashed Berkshire's remaining stake in Apple by 25% during the quarter, leaving the company with approximately 300 million shares of the stock. That's less than one-third of the position Berkshire held a year ago.
Buffett started selling Apple shares in the fourth quarter of last year, but the sales took a big step up in the second quarter. When asked about the sales during Berkshire's annual shareholder meeting, Buffett told the audience it's "extremely likely" Apple will remain Berkshire's largest equity holding at the end of the year. With three months left in the year, that remains true. Apple accounted for over 25% of Berkshire's $271.7 billion portfolio at the end of the third quarter.
In Q3, Buffett also turned his attention to Berkshire's second-largest equity position at the time, Bank of America. He sold $9.6 billion worth of the stock last quarter. He also sold $900 million of shares in October before Berkshire's stake in the bank fell below SEC reporting requirements.
Buffett told shareholders he's taking advantage of the current tax law to realize capital gains at a lower tax rate. The current corporate tax rate is set to revert from 21% to 35% after 2025. The size of the gains on Berkshire's Apple and Bank of America positions are quite substantial.
Implicitly, though, Buffett's selling the positions because he feels the stocks are trading near or above their intrinsic value. It doesn't make sense to sell an asset well below intrinsic value just to save on taxes. There are several other positions in Berkshire's portfolio with huge amounts of capital gains baked into them, but Buffett hasn't chosen to sell them.
The biggest warning yet
Perhaps even more of a warning that Buffett sees many stocks as expensive is the fact he hasn't bought back a single share of Berkshire Hathaway in four months. Based on the number of shares outstanding on Oct. 21, Buffett didn't buy back any shares in the first three weeks of Q4 either.
Following a change to the share repurchase authorization in mid-2018, Buffett was able to buy back shares of the stock as long as he felt they traded below their intrinsic value on a conservative basis. He went on to purchase tens of billions of dollars worth of Berkshire stock over the next six years. In total, he spent over $77 billion of Berkshire's cash buying back shares.
But share repurchases slowed to a total of just $345 million in Q2, including $0 spent in June. Buffett seemingly continued to see the stock as priced above its intrinsic value in Q3. At a price-to-book value above 1.5 for most of the quarter, it's a fair assessment from Buffett, especially if he thinks many of the equities in Berkshire's portfolio are trading at or above intrinsic value as well.
Combining the stock sales from Berkshire's equity portfolio with the $10 billion of operating income and a lack of share repurchases is a recipe for building up lots of cash. With $325 billion in cash and Treasuries, Berkshire's cash pile is now substantially larger than its entire equity portfolio.
What it all means for investors
Simply put, Warren Buffett doesn't see a lot to like in the stock market, at least for Berkshire Hathaway's portfolio.
Valuations are stretched with the S&P 500 trading at a forward price-to-earnings of about 21.8, well above its long-term average of 15.7. The Shiller CAPE ratio is above 36, a level we saw briefly in 2021 before the 2022 bear market. The only other time the valuation metric was that high was ahead of the dot-com crash.
That said, Buffett's situation is far different from the average investor's. With an equity portfolio worth about $280 billion and cash and Treasuries worth another $325 billion, Buffett's options are fairly limited. As he put it in his 2023 letter to shareholders, "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire." In other words, for an investment to be worth the time and effort for Berkshire to analyze and buy, it must be a very large company.
That nuance is important for individual investors. Smaller investors have many more opportunities. That's something Buffett discussed at Berkshire's shareholder meeting in May: "I would not like to be running $10 billion now. $10 million I think we could, I think Charlie or I could earn high returns on."
So, while Buffett doesn't see a lot to like in large-cap stocks, there may be opportunities in small- and mid-cap stocks where valuations are lower and shares are more attractive.
