Warren Buffett’s silent warning to Wall Street of $56 billion could portend trouble for stocks

In 1973, Berkshire Hathaway(NYSE:BRK.A)(NYSE:BRK.B) held its first annual meeting in the cafeteria of one of its subsidiaries and brought together a few dozen people. Last weekend, about 40,000 investors attended Berkshire’s annual shareholder meeting in Omaha, Nebraska.

The insatiable lure for these investors is the ability to listen to the great investor Warren Buffett talk for hours about his business, the American economy and the stock market. After all, the “Oracle of Omaha,” as the investment community jovially calls him, has generated an aggregate return of nearly 4,900,000% for his company’s (BRK.A) Class A shareholders since he became CEO in the mid-1960s, and nearly doubled in size. increase the annualized total return, including dividends, of the benchmark index S&P500 on the same timeline.

While plenty of investing knowledge was bestowed upon shareholders at Berkshire’s annual shareholder meeting, it was the company’s first-quarter operating results that really stole the show – and didn’t. given little reason for optimists to rejoice.

Warren Buffett’s Short-Term Actions Don’t Always Align With His Long-Term Investing Philosophy

Throughout his tenure as CEO of Berkshire Hathaway, the Oracle of Omaha made it clear that he would “never bet against America.” He and his team, which included the affably nicknamed “the architect of Berkshire Hathaway” Charlie Munger until his death in November, were firm believers in buying stakes in great companies at a fair price and simply letting time work its magic.

However, what Warren Buffett preaches in front of 40,000 people and what he and his top investment advisors, Todd Combs and Ted Weschler, do on shorter time frames don’t always match up.

During the quarter ended in March, Berkshire’s consolidated cash flow statement shows that $2.691 billion in stock purchases were overseen, as well as (drumroll) $19.972 billion in equity sales . This equates to $17.281 billion in net sales activity during the first quarter.

But here’s the thing: it’s the sixth consecutive quarter Buffett and his team are net sellers of stocks.

Collectively, Warren Buffett and his top investment associates have overseen $56.09 billion in total net stock sales since October 1, 2022.

Oracle of Omaha’s Silent $56 Billion Warning Portends Potential Trouble for Wall Street

Although Warren Buffett was always reluctant to offer negative criticism of the U.S. economy and/or stock market during his nearly six-decade tenure as CEO of Berkshire Hathaway, $56 billion in net securities sales participation over an 18-month period speaks volumes without the Oracle of Omaha having to say a word.

The culprit for this consistent net-selling activity appears to be a historically expensive stock market and the irrational behavior of some of its participants.

In Buffett’s annual letter to shareholders released in February, he said this about the “casino-like behavior” he wants no part of:

Although the stock market is much larger than it was in our early years, today’s active participants are neither more emotionally stable nor better educated than I was in school. For some reason, markets today exhibit much more casino-like behaviors than when I was young. The casino now resides in many homes and tempts occupants on a daily basis.

Ultimately, Warren Buffett and his team want a fair deal on a big company, and they’re not willing to give up on that ideal. As the S&P 500’s Shiller price-to-earnings (P/E) ratio shows, there just aren’t many good deals out there at the moment.

S&P 500 Shiller CAPE ratio data by YCharts.

The Shiller P/E ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), is based on average inflation-adjusted earnings over the past 10 years. This differs from the traditional P/E ratio which only looks at earnings over the trailing 12 months. The advantage of Shiller’s price-to-earnings ratio, which averages earnings over a 10-year period, is that it minimizes the impact of one-off events (e.g. COVID-19 lockdowns).

As of the May 3 close, the Shiller P/E for the S&P 500 stood at 34.05. That’s almost double its average reading of 17.11 when tested back to 1871, and is the third highest reading during a bull market in more than 150 years.

Perhaps the biggest concern is what historically followed the previous five instances where the Shiller P/E ratio exceeded 30 during a bull market rally. Following the five previous instances, the S&P 500 or Dow Jones Industrial Average then lost between 20% and 89% of their respective value. Although the Shiller P/E ratio is not a timing tool (i.e. stocks can remain expensive for several quarters or even years), values ​​above 30 tend to be a precursor sharp declines in the stock market.

Buffett and his team’s lack of willingness to buy stocks over an 18-month period suggests they are expecting valuations to contract.

Being patient has been a winning formula for Warren Buffett and Berkshire shareholders

To add fuel to the fire, showing that Buffett and his major investors are in no hurry to grow their company’s capital, Berkshire’s cash holdings, including Treasury bonds, have reached a whopping $189 billion. dollars as of March 31. At his company’s annual shareholder meeting, Buffett also suggested that it was likely that Berkshire’s treasury would exceed $200 billion by the end of the current quarter.

Despite these clear signs that neither Buffett nor his team currently see much value, there is no reason for long-term investors, or Berkshire Hathaway shareholders, to despair.

For starters, the Oracle of Omaha has not been afraid to use Berkshire’s large cash position during times of economic turmoil to take advantage of unique opportunities. A perfect example being the $5 billion in preferred stock acquired by Berkshire in Bank of America(NYSE:BAC) during the debt ceiling crisis of 2011.

While BofA’s preferred stock yielded a 5% yield, it was the warrants for 700 million shares of Bank of America at a strike price of $7.14 that proved invaluable. Berkshire’s enormous treasury allowed it to capitalize on Bank of America’s push to shore up its cash position during a period of instability for big banks. Today, BofA has a solid financial foundation and benefits enormously from higher interest rates.

Buffett and his team also understand that growth periods in the U.S. economy last disproportionately longer than downturns. While no U.S. recession after World War II lasted more than 18 months, most growth periods last several years. In fact, two economic expansions since World War II have exceeded the ten-year mark.

Berkshire’s brightest minds have filled their firm’s investment portfolio with cyclical businesses that can take advantage of these long periods of growth for the U.S. and global economies. Having plenty of cash on hand simply allows Buffett and his associates to jump into proven businesses when these short-lived recessions materialize.

Although Buffett’s 18-month net sales streak may be disappointing in the short term, history suggests that being patient is a winning formula for the Oracle of Omaha and his company’s shareholders.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams holds positions at Bank of America. The Motley Fool holds positions and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.