Buffet's Preferred Stock Receives Over $77.8 Billion Investment from Buffett Since 2018. What Led to His Recent Abstention from Purchases?
In 1965, Warren Buffett took the helm of the mighty Berkshire Hathaway (BRK.A 1.42%, BRK.B 1.11%), a company boasting a $290 billion portfolio of publicly traded stocks, numerous private ventures, and an impressive $325 billion cash fund. This war chest allows for opportunities when they arise.
If you'd invested $1,000 into the S&P 500 back in 1965, it'd be worth a cool $342,906 today, no sales involved! However, dropping the same amount on Berkshire at the same time would've netted you a staggering $42.5 million. The financial juggernaut has consistently outperformed the stock market, which isn't overlooked by Wall Street.
To some surprise, in 2024, Buffett entered a selling spree as revealed in Berkshire's 13-F filings. But the recent financial reporting (Q3 ending Sept. 30) sparked something even more intriguing. For the first time in six years, Buffett refrained from acquiring his beloved stock.
Why the change of heart?
The Market's Rich Valuation
The S&P 500 posted a 25% return in 2024, which topped the 26.3% gain in 2023. This is only the second time in history (since 1957) that the index has experienced back-to-back gains of 25% or more - a feat it achieved during the dot-com internet bubble in 1997 and 1998.
Currently, the S&P trades at a P/E ratio of 24.8, a 37% premium compared to its long-term average of 18.1. While valuation may not be a great timing tool, it (and other market conditions) influences decisions that Buffett believes will benefit Berkshire shareholders.
Berkshire's Portfolio Trims
Berkshire's largest holding is Apple stock, valued at over $170 billion at the beginning of 2024, accounting for half of Berkshire's overall portfolio value. In the first nine months of 2024, Buffett and his team reduced Berkshire's stake in Apple by 46%, making it around a quarter of the portfolio's worth.
Apple is leading the S&P 500 and is even more expensive than the index, with a multiyear-high P/E ratio in 2024. Despite a recent dip, its P/E still hovers around 38.9 - well above its 10-year average of 22.5. It's possible that valuation played a role in Berkshire's decision to cash in on some gains.
Berkshire also reduced its positions in Bank of America, Chevron, and T-Mobile, among others, and completely exited its stakes in Snowflake, HP, Floor & Decor, and Paramount Global. Berkshire now holds a record $325 billion cash, hinting at possible caution regarding market conditions.
Buffett Hesitates on Berkshire Hathaway Stock
Berkshire's stock buyback program, initiated in 2018, has seen $77.8 billion worth of shares repurchased, more than twice the amount Berkshire invested in Apple. However, unlike previous quarters, Berkshire didn't repurchase any shares in Q3 2024 - a sign Buffett might be concerned about the company's valuation.
Buffett's stock buyback program allows him to repurchase shares at the cheapest price, boosting value for shareholders. In 2024, Berkshire's P/S ratio jumped to 2.5, an increase of 26% over its 10-year average of 1.98. By waiting for a lower price, Buffett can remove more shares from circulation for each dollar spent.
It remains to be seen if Berkshire resumes its buyback program after reporting its Q4 2024 financial results, scheduled for early 2025. But Berkshire's recent actions - including the reduction of stock holdings, preserving cash, and halting share repurchases - may not be a positive sign for the broader market, given the S&P 500's 4% decline over the last month. Investors should prepare for a potential downturn, as history suggests Buffett will be buying the dip.
Given Berkshire Hathaway's substantial cash reserves and Warren Buffett's history of prudent investing, it's likely that he is carefully analyzing the current market's finance and valuation before making any significant moves. Buffett might be waiting for an opportune moment, when stocks' prices are favorable for both Berkshire and its shareholders.
In light of the S&P 500's escalating valuation and Berkshire's recent portfolio adjustments, it's essential for investors to consider the potential impact on their own investment strategies. Some may decide to follow Buffett's lead and temper their investments, anticipating a possible dip in the market.
