Warren Buffett Remains in Command at Berkshire as Market Valuation Alarms Sound
Key Takeaways
- Despite relinquishing the CEO position, Warren Buffett continues to drive major investment choices at Berkshire Hathaway
- A $10 billion Alphabet share acquisition in Q2 was personally spearheaded by Buffett
- Berkshire’s portfolio now lists Alphabet as its third-biggest position, barely surpassing Coca-Cola
- In May, Buffett cautioned that market participants are behaving with a “gambling mood” and treating equities like casino bets
- July saw the S&P 500’s CAPE ratio reach 40.6, a peak not witnessed since 2000’s dot-com bubble, historically preceding average three-year declines of 30%
Though Warren Buffett formally transferred Berkshire Hathaway’s CEO responsibilities to Greg Abel this past December, recent developments indicate he remains the principal architect behind the company’s stock selections.
According to Bloomberg News, the conglomerate’s massive second-quarter Alphabet share purchase totaling $10 billion originated from a weekend conversation with Goldman Sachs. While Abel provided swift approval, Barron’s sources reveal that Buffett was the driving force behind the transaction.
In a CNBC interview conducted last month, Buffett explicitly stated that he personally “initiated” the Alphabet position, which initially emerged in Berkshire’s holdings during the previous year’s third quarter.
The Real Power Behind Investment Decisions
According to Barron’s analyst Andrew Bary, Abel lacks substantial portfolio management credentials and isn’t directing equity purchase decisions. Instead, Abel concentrates on overseeing Berkshire’s various operational subsidiaries and pursuing acquisition opportunities.
Abel did execute capital deployment in one instance. He greenlit the $6.8 billion Taylor Morrison Home acquisition, although this transaction finalized beyond the second quarter’s conclusion.
The quarter’s second-most substantial investment, Delta Air Lines, is attributed to portfolio manager Ted Weschler rather than Abel.
Berkshire’s Alphabet position expanded by approximately $17 billion during Q2, elevating the technology giant to third place among holdings. At June 30, Alphabet represented $37.77 billion in market value, edging past Coca-Cola at $32.51 billion.
Subsequently, Alphabet declined 3.5% while Coca-Cola surged 12.1%. By Friday’s market close, Alphabet’s advantage over Coca-Cola had narrowed to merely $20 million.
Market Valuation Concerns and the CAPE Metric
Beyond portfolio moves, Buffett delivered a comprehensive market cautionary statement in May. He characterized investors as operating in a “gambling mood” and described certain valuations as appearing “very silly.”
Market data substantiates this concern. The S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio, a valuation metric developed by Nobel Prize winner Robert Shiller, climbed to 40.6 in July. This represents the highest measurement since September 2000’s dot-com market collapse.
Such elevated valuations for the S&P 500 have occurred during just 3% of the period since the index’s 1957 inception.
Historical patterns following CAPE readings exceeding 40 paint a concerning picture. The index has never delivered positive returns over subsequent three-year periods from such elevated levels. Average three-year performance in these scenarios has been negative 30%.
Analysts project S&P 500 constituent companies will deliver 50% earnings expansion in Q2, representing the most robust growth outside post-recession recovery periods. Some market observers suggest that robust earnings performance could justify current index valuations.
The CAPE metric relies on historical data and doesn’t incorporate prospective earnings trajectories. Whether artificial intelligence-powered earnings strength can sustain current market levels remains an open question.