If you had invested $1,000 in the S&P 500 in 1965, it would be worth about $325,053 today. However, if you had invested $1,000 in shares of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) at the same time, it would now be worth a whopping $42.5 million.
It was 1965 when Warren Buffett became CEO of Berkshire. Now, he oversees a $291 billion portfolio of publicly traded stocks and securities, as well as several wholly owned private businesses. Berkshire is also sitting on $325 billion in cash, which Buffett and his team can put to work when they see new opportunities.
Given Berkshire's incredible performance relative to the S&P 500, it's no surprise that Wall Street is watching Buffett's every move. According to the conglomerate's 13-F filing, it is on a big selling spree in 2024.
However, Berkshire's financials for the third quarter revealed something even more surprising. For the first time in six years, Buffett he didn't buy his favorite stock. Here's why that should be ringing alarm bells on Wall Street.
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Berkshire spent about $38 billion buying shares of An apple(NASDAQ: AAPL) between 2016 and 2023, which is the most money he has ever invested in a single company. That position was worth over $170 billion at the start of 2024, so Berkshire was sitting on a very nice return.
Apple accounted for half the value of Berkshire's entire portfolio of publicly traded stocks and securities at the time. The conglomerate sold small amounts of Apple stock over the years to cash in some of its gains, but sales increased significantly in 2024.
Berkshire unloaded 13% of its Apple position in the first quarter, which Buffett said was for tax reasons. But then the conglomerate sold 49% of its remaining Apple shares in the second quarter, and then 25% of what was left in Q3. No real reasons were provided.
An apple It remains Berkshire's largest site with a weighting of 25.7% in his portfolio, so it seems that Buffett has not adopted a very negative view of the company. What's more, it's not the only stock Berkshire has been docked this year.
In 2024 so far, Berkshire reduced its share in Chevron, T-Mobile, Financial Capital Onea Bank of America. He also sold his entire sites in Paramount Global, HP, Floor Holdings and Decorationand an artificial intelligence company A snowflake.
As I mentioned earlier, Berkshire is now sitting on $325 billion in cash. This is the largest pile of dry powder the conglomerate has ever captured.
The S&P 500 is up almost 25% this year, which follows a solid 26% gain in 2023. Considering it's average annual return of 10.5% goes all the way back to when it had was established in 1957, this was a sweeping storm of two. one year run. However, it is now undeniably expensive. The index trades at a price-to-earnings (P/E) ratio of 25.7 as of this writing, a 42% premium to its long-term average of 18.1.
Apple is the largest company in the S&P 500, and it looks even more more expensive than the index. It currently trades on a P/E ratio of 41.1, which approaches double its 10-year average of 22.4.
Valuation is not a good timing tool because markets can remain expensive for years, so this is not a signal for investors to sell all their stocks. However, Buffett has an obligation to make decisions that he feels will benefit Berkshire shareholders, so cashing in on some of the conglomerate's incredible gains from the past few years is a good way to manage a portfolio at these extreme valuations.
Buffett has bought one stock every quarter since 2018 regardless of what the broader market is doing. You won't find it in the conglomerate's 13-F filings, because the stock is….Berkshire Hathaway!
Buffett authorized the repurchase of $77.8 billion worth of Berkshire stock over the past six years, more than twice the amount he has invested in Apple. When Berkshire buys its own stock in the open market, it reduces the number of shares in circulation, which organically increases the price per share by a proportional amount. Buybacks are Buffett's preferred way to return money to shareholders (as opposed to paying a dividend).
But during Q3 2024, Buffett did not give authority any redeem at all. As per the chart below, this is the first time he has overlooked his favorite stock since the buyback program began in 2018.
Two things could be at work. First, given the valuations across the rest of the market, Buffett may feel that Berkshire's stock is also overpriced (it trades at a slight premium to its 10-year average price-to-sales ratio). Second, Buffett may want to keep cash in case of a steep correction in the S&P 500, so he can use it to pick up some deals.
So, this is probably just a temporary pause in Berkshire's buyback program. The conglomerate can repurchase its own stock at management's discretion as long as its cash, cash equivalents and holdings in US Treasury securities remain above $30 billion. As I mentioned earlier, that figure is currently $325 billion.
With all that said, when an investment giant like Berkshire trims its portfolio, hoards cash, and ignores cash, it's not a great sign for the broader market. Investors shouldn't rush to sell stocks, but they should be mentally prepared for a possible correction in the S&P 500 in the next year or two.
If that happens, it will almost certainly be a buying opportunity.
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Bank of America is an advertising partner of Motley Fool Money. Anthony Di Pizio does not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, HP, and Snowflake. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
