Warren Buffett's $166 Billion Warning to Wall Street Has Become Deafening

For decades, no money manager has been more closely followed by investors than Berkshire Hathaway (BRK.A) (BRK.B 0.63%) CEO Warren Buffett. Since ascending to the CEO chair in the mid-1960s, the “Oracle of Omaha,” as he’s now known, has overseen a cumulative return in his company’s Class A shares (BRK.A) that’s approaching 5,500,000%!

Riding Buffett’s coattails by mirroring his investing activity at Berkshire Hathaway has been a successful investment strategy for a long time. However, this strategy has shifted in a big way over the last two years.

Warren Buffett’s warning to Wall Street is louder than it’s ever been

Based on close to a half-century of annual letters from Buffett to his shareholders, as well as 50 years of annual shareholder meetings, it’s plainly evident that Berkshire’s chief is a long-term optimist who believes in the American economy and U.S. stock market. But occasionally, his words and his actions fail to align over shorter time frames.

Although quarterly filed Form 13Fs provide a concise snapshot of what Berkshire Hathaway’s brightest investment minds have been buying and selling, a more accurate gauge of Buffett’s sentiment toward stocks can be found in his company’s quarterly operating results. By examining Berkshire’s cash flow statement, investors can compare “purchases of equity securities” to “sales of equity securities” on a quarter-by-quarter basis to see if Buffett and his team have been buyers or sellers of stocks.

In the fourth quarter of 2022, the Oracle of Omaha and his team began paring down Berkshire Hathaway’s mammoth stock portfolio. Based on the Berkshire’s third-quarter filing last weekend, this net-selling activity has extended for an eighth consecutive quarter:

• Q4 2022: $14.64 billion in net-equity sales
• Q1 2023: $10.41 billion
• Q2 2023: $7.981 billion
• Q3 2023: $5.253 billion
• Q4 2023: $0.525 billion
• Q1 2024: $17.281 billion
• Q2 2024: $75.536 billion
• Q3 2024: $34.592 billion

On a cumulative basis, Warren Buffett has overseen $166.22 billion in net stock sales over the trailing-two-year period, ended Sept. 30, 2024.

Fair value estimates of Berkshire’s top-five holdings show that another approximately 100 million shares of top holding Apple (AAPL 0.65%) were sent to the chopping block in the third quarter. Over the trailing year, north of 615 million shares of Apple have been sold by Buffett’s company. Additionally, more than 266 million shares of Bank of America (BAC 1.33%) were given the boot since July 17, based on required Form 4 filings with the Securities and Exchange Commission.

The cherry on the proverbial sundae is that the September-ended quarter marked the first time in 25 quarters (since the midpoint of 2018) that Warren Buffett didn’t repurchase any of his company’s stock.

While Buffett remains largely silent about this continued selling activity, his actions have become deafening.

Value is difficult to come by, as Buffett’s actions demonstrate

On top of being a long-term optimist and someone who has, on multiple occasions, encouraged investors not to bet against America, the Oracle of Omaha is an ardent value investor. He wants a perceived deal when making an investment and has demonstrated a willingness to sit on his hands (and Berkshire’s cash) until a company’s valuation makes sense.

With eight consecutive quarters of net-selling activity now in the books, it’s plainly evident that value is getting harder for Buffett to find on Wall Street.

While most investors turn to the traditional price-to-earnings (P/E) ratio to decipher whether a publicly traded company is cheap or pricey, relative to its peers and the broad-market stock indexes, there’s a far better measure of value that offers apples-to-apples comparison dating back more than 150 years. I’m talking about the S&P 500‘s (^GSPC 1.23%) Shiller P/E ratio, which is also commonly referred to as the cyclically adjusted P/E ratio, or CAPE ratio.

S&P 500 Shiller CAPE Ratio data by YCharts.

Instead of relying on a company’s or index’s trailing-12-month earnings per share (EPS), the Shiller P/E accounts for average inflation-adjusted EPS over the prior 10 years. Analyzing a decade’s worth of inflation-adjusted earnings smooths out the effects of shock events that can make the traditional P/E useless at times.

As of the closing bell on Nov. 1, the S&P 500’s Shiller P/E ratio tipped the scales at 36.46. For context, this is more than double its average reading of 17.17, when back-tested to January 1871. It’s also the third-highest the S&P 500’s Shiller P/E has been during a continuous bull market rally. Only readings from the dot-com bubble and late 2021/early 2022 exceed the current multiple.

Over the last 153 years, there have only been six instances where the Shiller P/E ratio has surpassed 30 during a bull market. Although it’s impossible to pinpoint how long stock valuations can remain extended, the five previous occurrences where the Shiller P/E topped 30 eventually resulted in Wall Street’s major stock indexes losing between 20% and 89% of their value.

Warren Buffett’s silent warning appears to foreshadow eventual trouble for Wall Street.

Buffett has a lengthy history of pouncing on price dislocations

To be fair, the Shiller P/E ratio isn’t the only event, forecasting tool, or data point that suggests the U.S. economy and/or stock market may be facing some near-term turbulence. The first notable decline in U.S. M2 money supply since the Great Depression, along with the longest inversion of the Treasury yield curve in history, also point to trouble for Wall Street.

While downside in the stock market isn’t something most investors look forward to, it’s the ideal scenario for Warren Buffett’s cash-rich company. Berkshire Hathaway closed out the September quarter with a record $325.2 billion in cash, cash equivalents, and U.S. Treasuries.

For decades, the Oracle of Omaha has generated the lion’s share of Berkshire Hathaway’s investment gains by pouncing on price dislocations during shock events.

For example, Buffett purchased $5 billion worth of Bank of America preferred stock in August 2011. This $5 billion was designed to buoy BofA’s balance sheet following the trough of the financial crisis. But for Buffett, it allowed him to take a stake in one of America’s leading money-center banks at just 38% of its listed book value.

Additionally, this investment came with warrants to purchase up to 700 million common shares of Bank of America stock at an exercise price of $7.14. These shares were fully exercised in 2017, leading to a windfall unrealized profit for Berkshire’s chief.

This is just one of the many ways Buffett and his team will use their company’s mammoth cash pile to take advantage of price dislocations and emotion-driven events. Berkshire Hathaway’s nearly 20% annualized return over the last six decades suggests Buffett’s strategy works.

Though it could be a while before we see Berkshire’s treasure chest put to work, one thing that hasn’t changed is Warren Buffett’s unwavering faith in the U.S. economy and stock market over long periods.