Is Buffett Primed To Pounce On a Crash?

In 2024, value investing legend Warren Buffett did the seemingly unthinkable by selling stocks aggressively in a year that saw the S&P 500 climb by about 23 percent.

While the exact figures on Buffett’s selling won’t be known until Berkshire Hathaway releases its Q4 earnings report, the total stood at a staggering $133 billion as of the end of Q3.

Why did Buffett sell so much stock in 2024, and what do his decisions say about the state of the American stock market as a whole?

Key Points

• Buffett sold stocks due to high market valuations and trimmed Apple’s oversized 26.6% share of Berkshire’s portfolio.
• Rising interest rates made 5% Treasury Bill yields a safer, lucrative alternative to overvalued stocks.
• Following Benjamin Graham’s principles, Buffett is stockpiling cash to capitalize on future market corrections.

Stock Valuations Outside of Buffett’s Comfort Zone

The key driver behind Buffett’s decision to sell was likely the fact that stock prices soared beyond what he saw as sustainable. The average P/E ratio of the S&P 500 is currently at 29.6, a rather high level compared to historical averages.

Buffett even seems to believe that Berkshire Hathaway itself is no longer undervalued, as Q3 was the first quarter in years during which he chose not to repurchase any of the company’s shares.

To get a general sense of just how pricey US securities have become, we can take a look at one of Buffett’s own favorite indicators of stock market valuation. The ratio of the stock market’s total capitalization to America’s GDP is sometimes called the Buffett indicator because Buffett famously uses it to gauge whether stocks are cheap or expensive compared to America’s economic output. Right now, that ratio is at 208%, which is more than 65% higher than its average range.

High valuations are even more of a problem for Buffett and Berkshire than they are for smaller investment institutions and retail investors. Even when the market at large is overvalued, volatility and market inefficiency will necessarily produce at least some undervalued stocks.

The problem is that this is much more likely to happen with small and medium-sized companies that attract less attention than giant blue-chip firms. Owing to the sheer size of the Berkshire Hathaway portfolio, however, Buffett can’t make meaningful investments in smaller businesses.

Indeed, Buffett is far from alone in worrying about overvaluation in the US stock market. Goldman Sachs, for example, recently noted that American stocks are priced with essentially perfect results factored in, making them vulnerable to everything from simple earnings misses to risks from political volatility.

Buffett’s Portfolio Too Concentrated?

Another fact that could have driven some of Buffett’s 2024 strategy was the extreme concentration of Apple in the Berkshire Hathaway portfolio.

Even after selling around 615 million shares of the tech giant in 2024, Apple still makes up around 26.6% of Berkshire’s total holdings. This line of reasoning likely doesn’t account for Buffett’s selling activity in stocks other than Apple, as none of them made up nearly as large a part of Berkshire’s portfolio.

Buffett is known to reject the traditional wisdom of diversifying broadly, preferring to invest as much as possible into a concentrated portfolio of the best businesses he can find. He has even publicly stated that he’s comfortable having as much as 75% of his own net worth invested in a single idea.

In Apple’s case, however, Buffett may have judged that too much of Berkshire’s money was tied up in a stock that had become overvalued. Even today, Apple trades at about 39x earnings, making it risky from a valuation perspective.

High Interest Rates Made Cash More Attractive

A final factor that may have nudged Buffett to sell some of his company’s stock portfolio is the fact that putting cash into short-term US Treasury Bills has become fairly appealing.

With the rates on these bills having risen to about 5% after years of near-zero rates, Berkshire Hathaway can earn a fairly large and essentially risk-free return on the money it pulls back out of the stock market.

Whether or not the ability to earn a reasonably high guaranteed return in US debt directly contributed to his selling decisions last year, Buffett has certainly taken full advantage of the opportunity. As of the end of Q2 2024, Berkshire Hathaway owned more US Treasury Bills than the Federal Reserve itself.

Why Did Buffett Sell So Much Last Year?

Extremely high stock valuations combined with a highly concentrated portfolio created the risk for substantial losses if the market corrected back to more normal territory. While no single factor above may fully explain Buffett’s selling decisions, they combine to paint a fairly clear picture of why the investing legend has pulled so much of his company’s money back to cash.

Meanwhile, high yields on short-term US debt instruments created the opportunity for Berkshire to make significant amounts of money on its uninvested cash at a very minimal level of risk.

Though the selling in 2024 may seem extreme, it ties back fairly well to Buffett’s roots as a classic value investor. Benjamin Graham, Buffett’s mentor and the intellectual founder of value investing, advised buying stocks when they were undervalued and selling once they became significantly overvalued.

Over the years, Buffett has developed a habit of holding stocks in his favorite companies for years or even decades. With the market looking as expensive as it does right now, though, it’s easy to understand why a value investor like Buffett would choose to sell.

A final piece of the puzzle may come in the form of what Buffett could eventually do with the cash his company is holding. For years, Buffett has been looking for deals big enough to deploy a large amount of Berkshire’s cash. Though such opportunities have been scarce, Buffett’s strategy is one based on patience. Eventually, either he or his successors will have opportunities to buy discounted stocks with the money Buffett has stockpiled while the market looked too expensive.

In the end, Buffett mostly seems to be taking some of his own most famous advice, namely to be fearful when others are greedy and greedy when others are fearful. With stocks looking overvalued, Buffett likely decided to take some of his gains off the table and wait for better future opportunities to deploy the cash.