Every year, in the neighborhood of 40,000 people flock to Omaha for a chance to hear Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett speak about stocks and the U.S. economy. This mecca for investors has been driven by the Oracle of Omaha's vast outperformance of the benchmark S&P 500(SNPINDEX: ^GSPC) since taking over as CEO six decades ago.
Whereas the S&P 500 has delivered an impressive total return, including dividends, of around 40,000% through the closing bell on Dec. 26, Buffett has steered his company's Class A shares (BRK.A) to a cumulative gain of 5,515,517% over the same span. Using Berkshire Hathaway's quarterly filed Form 13Fs to mirror Buffett's trading activity has been a path to riches for decades.
But as we prepare to enter the new year, Wall Street's "Oracle" has given investors 166 billion reasons to be fearful.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett has been a persistent net seller of stocks for two years
Perhaps the most famous of all Warren Buffett quotes is "Be fearful when others are greedy, and greedy when others are fearful." Even though Warren Buffett has reminded investors not to bet against America throughout the years, he's an unabashed value investor who isn't afraid to sit on his hands and wait for price dislocations to crop up.
Based on Buffett's actions over the last two years, through the end of September, he's clearly fearful of what may be to come for Wall Street. Specifically, he and his team have sold more stock than they've purchased for eight consecutive quarters (Oct. 1, 2022 through Sept. 30, 2024):
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
Collectively, this works out to $166.22 billion in net stocks sales over two years, and it's increased Berkshire Hathaway's cash balance, including U.S. Treasuries, to north of $325 billion. It's certainly not something you'd expect to see from one of Wall Street's most revered long-term optimists.
Stocks are historically pricey, and the Oracle of Omaha is struggling to find a good deal
During Berkshire Hathaway's annual shareholder meeting in early May, he intimated that some of his recent selling activity may be for tax purposes. With his company sitting on sizable unrealized gains from Apple and Bank of America(NYSE: BAC), and the corporate income tax rate at its lowest level since 1939, he opined that locking in some gains would, in hindsight, be viewed as a smart move by Berkshire's shareholders.
But there may be more to this selling than just minimizing Berkshire Hathaway's tax bill. Namely, stocks are historically pricey, and it's becoming increasingly difficult for Buffett to find a good deal.
In an interview with Fortune magazine back in 2001, the Oracle of Omaha referred to the market cap-to-gross domestic product (GDP) ratio as "probably the best single measure of where valuations stand at any given moment." This ratio quickly became known on the Street as the "Buffett Indicator" -- and it's been making history of late.
Since 1970, the aggregate value of all publicly traded companies divided into U.S. GDP has averaged around 85% (0.85). In October 2024, it crested 200% for the first time ever and hit an all-time high above 209% in December, as measured by dividing the Wilshire 5000 Index into U.S. GDP.
Although the Buffett Indicator isn't particularly helpful in determining when downturns will take place in the S&P 500 and other broad-market indexes, it has acted as a warning of eventual downside in the stock market. The Buffett Indicator peaked at 144% prior to the dot-com bubble bursting, 107% before the financial crisis, 166% immediately ahead of the COVID-19 pandemic, and 195% prior to the 2022 bear market taking shape. These events were respectively followed by S&P 500 declines of 49%, 57%, 34%, and 28%, on a peak-to-trough basis.
The tea leaves couldn't be clearer that Buffett is locking in gains ahead of 2025 and being fearful when others are being greedy in a historically pricey market.
Image source: Getty Images.
Buffett also has more than 5.5 million reasons for investors to be optimistic
Based on Berkshire Hathaway's 13Fs over the previous eight quarters, it's evident that Buffett and his top advisors, Todd Combs and Ted Weschler, aren't finding much in the way of value. However, this doesn't change the Oracle of Omaha's long-term thesis of not betting against America and expecting wonderful businesses to increase in value over time.
Even though Buffett's short-term actions may not always line up with the long-term ethos he preaches, the greater than 5,500,000% cumulative gain in his company's Class A shares since he took over as CEO isn't an accident. It's the result of Berkshire's chief staying true to his roots and remaining a value-focused investor who pounces during periods of Wall Street fear and turbulence.
Shortly after the financial crisis, Buffett invested $5 billion in Bank of America (BofA) to shore up its balance sheet. While the preferred stock Berkshire received provided a healthy 6% yield ($300 million in annual dividend income), it's the warrants to purchase up to 700 million shares of BofA stock at $7.14 per share that proved far more valuable. When these stock warrants were fully exercised in mid-2017, it instantly made Buffett's company a small fortune.
Warren Buffett has been taking advantage of price dislocations like this for decades. Though one may not exist right now, it's just a matter of time before he and his team put some of Berkshire's growing cash hoard to work.
To quote the Oracle of Omaha's letter to shareholders in 2009 following the height of the financial crisis, "Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
