Buffett’s actions don’t bode well for the market, but a falling market has benefits for investors.
Investors follow Warren Buffett’s moves closely. He has earned the respect of the investing community for his wisdom, common sense, and — most importantly — a track record of beating the market.
It’s exciting when he makes big moves, especially when they signal good times ahead. But Buffett is a realist, and he and his team at Berkshire Hathaway (BRK.A) (BRK.B 0.71%) take action based on the way the winds are blowing, not where they want them to be.
Berkshire Hathaway released its most recent quarterly report last week, and it was unusual for two reasons. First, there were no stock buybacks for the first time in more than five years. Second, instead of buying back stock, Berkshire Hathaway was a net seller of stocks in the quarter, and it has built up its cash stockpile to its highest-ever levels at $325 million.
Buffett didn’t provide commentary on what the company is thinking right now, at least not yet. But investors can connect the dots. Berkshire Hathaway is sending an ominous sign about where Buffett thinks the market is headed. But there’s a silver lining, and that’s the most important thing for investors to pay attention to right now.
Why is Buffett stockpiling cash?
There are several conclusions you can draw from Buffett’s recent moves. One is that he doesn’t see any good deals on the market right now. Buffett is a big believer in buying great businesses at fair prices. He waxed nostalgic about longtime business partner Charlie Munger in his 2024 annual shareholder letter, the first since Munger passed away. He credited Munger with changing his views from buying “fair businesses at wonderful prices” to “wonderful businesses purchased at fair prices.”
The focus is on the wonderful business, but even those have to be at fair prices to look attractive. We still don’t know exactly what Buffett bought or sold in the quarter; that information will be available when Berkshire Hathaway releases its next 13F filing. So he may have found some excellent deals. However, the overall sentiment is that it’s not a buyer’s market.
Image source: The Motley Fool.
Stocks are expensive these days. The average S&P 500 price-to-earnings ratio is nearly 28. The only other time it surpassed that level over the past 10 years was right before stocks fell in early 2022. The market has made an impressive recovery since then, so much so that valuations are already reaching these high levels.
Does that mean the market is going to crash? Not necessarily, but Buffett is preparing. It certainly looks like a correction could be on the way. Simplified, successful investing involves buying low and selling high. That’s what Buffett is doing. He’s selling during a market that has reached all-time highs, and he’s getting ready to splurge on deals if it goes lower.
The hidden benefit for investors
The idea of the market crashing, correcting, or otherwise going lower isn’t a very appealing one for the average individual investor. But the hidden benefit is that you, too, could find amazing deals and put your dollars to work in the best way for you.
Here’s some food for thought: Both Amazon and Nvidia lost 50% of their value when the market dropped in 2022. If you had spent $1,000 on each of them at their lows then, you’d have $14,835 today.
I’d have to imagine it was not easy for investors to hold on at that point. But new investors had an incredible opportunity, and they’re already reaping the benefits in a big way. If the market drops, you’ll have that same incredible opportunity again. Historically, the market has always rebounded from lows to get bigger and better.
Long-term investing means sticking it out through the ups and downs, and successful investing means grabbing opportunities when they come, like Warren Buffett.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.
