Had you invested $1,000 in the S&P 500 in 1965, it would be worth around $325,053 today. However, had you invested $1,000 in shares of Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%) at the very same time, it would now be worth a whopping $42.5 million.
It was 1965 when Warren Buffett became the CEO of Berkshire. Now, he oversees a $291 billion portfolio of publicly traded stocks and securities, in addition to several private wholly owned businesses. Berkshire is also sitting on $325 billion in cash, which Buffett and his team can put to work when they spot new opportunities.
Given Berkshire's incredible performance relative to the S&P 500, it's no surprise that Wall Street watches Buffett's every move. According to the conglomerate's 13-F filings, he is on a major selling spree in 2024.
However, Berkshire's financials for the third quarter revealed something even more surprising. For the first time in six years, Buffett didn't buy his favorite stock. Here's why that should be setting off alarm bells on Wall Street.
Image source: The Motley Fool.
Buffett slashed Berkshire's largest position this year
Berkshire spent around $38 billion buying shares of Apple (AAPL -1.32%) between 2016 and 2023, which is the most money it has ever invested in a single company. That position was worth over $170 billion at the start of 2024, so Berkshire was sitting on a very nice gain.
Apple accounted for half of the value of Berkshire's entire portfolio of publicly traded stocks and securities at that point. The conglomerate did sell small quantities of Apple stock over the years to cash in some of its gains, but it significantly ramped up the selling in 2024.
Berkshire offloaded 13% of its Apple position in the first quarter, which Buffett said was for tax reasons. But the conglomerate then sold 49% of its remaining Apple shares in the second quarter, followed by 25% of what was left in Q3. No real reasons were provided.
Apple remains Berkshire's largest position with a 25.7% weighting in its portfolio, so Buffett probably hasn't adopted a highly negative view on the company. Besides, it wasn't the only stock Berkshire trimmed this year.
In 2024 so far, Berkshire reduced its stake in Chevron, T-Mobile, Capital One Financial, and Bank of America. It also sold its entire positions in Paramount Global, HP, Floor & Decor Holdings, and artificial intelligence company Snowflake.
As I mentioned earlier, Berkshire is now sitting on $325 billion in cash. It's the biggest pile of dry powder the conglomerate has ever held.
The S&P 500 is expensive, which might explain Buffett's selling spree
The S&P 500 is up by nearly 25% this year, which follows a solid 26% gain in 2023. Considering it averages an annual return of 10.5% going all the way back to when it was established in 1957, this was a barnstorming two-year run. However, it is now unquestionably expensive. The index trades at a price-to-earnings (P/E) ratio of 25.7 as of this writing, which is a 42% premium to its long-term average of 18.1.
Apple is the largest company in the S&P 500, and it looks even more pricey than the index. It currently trades at a P/E ratio of 41.1, which is approaching double its 10-year average of 22.4.
AAPL PE Ratio data by YCharts.
Valuation isn't a good timing tool because markets can remain expensive for years, so this isn't a sign for investors to sell all of their stocks. However, Buffett has an obligation to make decisions that he feels will benefit Berkshire's shareholders, so cashing in some of the conglomerate's incredible gains from the last few years is simply good portfolio management at these extreme valuations.
Buffett shunned his favorite stock in Q3
There is one stock Buffett bought in every single quarter since 2018 no matter what the broader market was doing. You won't find it in the conglomerate's 13-F filings, because the stock is....Berkshire Hathaway!
Buffett authorized the repurchase of $77.8 billion worth of Berkshire stock over the last six years, which is more than twice the amount it invested in Apple. When Berkshire buys its own stock in the open market, it reduces the number of shares in circulation, which organically increases the price per share by a proportionate amount. Buybacks are Buffett's preferred way to return money to shareholders (instead of paying a dividend).
But during Q3 2024, Buffett didn't authorize any repurchases at all. Per the below chart, it was the first time he shunned his favorite stock since the buyback program started in 2018.
BRK.A Stock Buybacks (Quarterly) data by YCharts.
Two things might be at play. First, considering the valuations across the rest of the market, Buffett might feel that Berkshire stock is also too expensive (it trades at a slight premium to its 10-year average price-to-sales ratio). Second, perhaps Buffett wants to preserve cash in case there is a steep correction in the S&P 500, so he can use it to scoop up some bargains.
Therefore, this is probably just a temporary pause in Berkshire's buyback program. The conglomerate can repurchase its own stock at management's discretion as long as its cash, equivalents, and holdings in U.S. Treasury securities remain above $30 billion. As I highlighted earlier, that figure is currently $325 billion.
With all that said, when an investing giant like Berkshire is trimming its portfolio, hoarding cash, and shunning buybacks, it's not a great sign for the broader market. Investors shouldn't rush to sell stocks, but they should be mentally prepared for a potential correction in the S&P 500 during the next year or so.
If that happens, it will almost certainly be a buying opportunity.
