Warren Buffett's $300 billion warning to investors

From 1957 to 1968, Buffett Partnership Ltd. averaged an annual return of 31.6%, compared with a 9.1% return for the Dow Jones Industrial Average. He then merged BPL into Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which he took over in 1965. Since then, Berkshire Hathaway's stock has grown an average of 19.8% annually, compared with a 10.2% return for the S&P 500 through 2023.

Buffett has made several big decisions about Berkshire's portfolio recently, sending a sobering warning to stock investors: The stock market is no longer a great place to be.

By the third quarter, Buffett had accumulated nearly $300 billion in cash and government bonds, a record for Berkshire. So what led to this, and what does it mean for investors?

For seven consecutive quarters, Buffett has sold more stocks than he bought. In the most recent quarter, he made the largest stock sale in history, cutting Berkshire’s position in Apple (NASDAQ: AAPL) in half, or about $73 billion. The total value of shares sold in the first half of 2024 is $97 billion, while Buffett spent only $4.3 billion to add more.

The sell-off continues, and while official Q3 numbers are yet to be released, SEC filings show Buffett has sold a large portion of Berkshire's stake in Bank of America (NYSE: BAC). As of September 24, he had sold $9 billion worth of stock.

Buffett explained that he sold some of his holdings in stocks like Apple and Bank of America because he was worried about higher corporate taxes after the current tax law expires at the end of next year. Berkshire is sitting on a huge amount of unrealized profits from these two stocks, which have risen sharply since Berkshire started buying them (2016-2018).

However, Buffett's selling of stocks also implies that he believes the stocks are trading near or above their intrinsic value. If he believes they are undervalued, Buffett will be willing to pay higher taxes later to hold assets that are worth less now.

One of Buffett's favorite stocks in recent years has been Berkshire Hathaway. Since Berkshire's board updated its stock repurchase rights in 2018, Buffett has continued to buy back shares whenever he feels the price is below their intrinsic value.

However, the pace of share buybacks slowed significantly in the last quarter, totaling just $345 million. Buffett decided not to buy any more shares in June, and based on Berkshire’s July report, it appears he did not buy back shares at the start of the third quarter either.

Another stock Buffett has loved in recent years is Occidental Petroleum (NYSE: OXY). He invested $10 billion in preferred stock in 2019 and then bought 29% more common stock. However, there have been no reports of Buffett buying more Occidental shares since June, despite the stock falling sharply due to the collapse in oil prices.

With $9 billion in proceeds from the sale of Bank of America stock in the quarter and very little capital invested in new stocks, Berkshire's cash pile is growing rapidly. At the end of the second quarter, Buffett had $277 billion in cash and bonds.

When you factor in Berkshire’s core operating cash flow of about $10 billion, along with interest earned on its bond holdings, Berkshire’s cash position could easily exceed $300 billion. One factor that could prevent that is the expected tax bill the company faces after large stock sales earlier this year.

Berkshire's cash and bonds currently account for nearly 50% of its investable assets. That doesn't include the $169 billion in insurance it can invest.

Buffett's moves show that he is leaning toward safe assets and is unhappy with the valuation of the entire market, including Berkshire Hathaway's stock price. This sends a clear message to investors: There are not many worthwhile opportunities in the stock market at the moment, at least in Berkshire's portfolio.

Most individuals, however, do not have to manage a $600 billion portfolio as massive as Buffett. With such a large scale, navigating a giant ship is much more difficult than steering a small speedboat. Buffett also faces the challenge of generating market-beating returns for Berkshire shareholders. If investors can get similar returns from an S&P 500 index fund, is buying Berkshire Hathaway stock still worth it?

The reality is that many of the large-cap stocks that Berkshire has long targeted are now unattractive, including Berkshire Hathaway stock. Buffett's recent lack of share buybacks may be a sign of this.

For individual investors, the opportunities are still greater. Smaller stocks look more attractive in terms of valuation and could benefit from interest rate cuts and money supply growth over the next few years.

While Buffett's warning should not be ignored, retail investors still have many options for investing effectively in the stock market.

Dung Phan (According to MSN)

Source: https://www.congluan.vn/loi-canh-bao-tri-gia-300-ty-usd-cua-ty-phu-warren-buffett-den-cac-nha-dau-tu-post314736.html