Buffet's Cryptic and Overt Alerts to Wall Street: Essential Actions for Investors as 2025 Draws Near
Buffet's Cryptic and Overt Alerts to Wall Street: Essential Actions for Investors as 2025 Draws Near
Warren Buffett likely doesn't chat much with Wall Street analysts, differing from the norm for most CEOs of publicly traded companies. Berkshire Hathaway, unlike many other S&P 500 companies, doesn't conduct quarterly earnings conference calls.
However, Buffett is still seemingly communicating with Wall Street through his actions. There's the cryptic warning and the not-so-subtle one.
Buffett's understated caution
Many companies often keep their lips sealed about what they're not doing. Berkshire Hathaway does the same. You need to be vigilant to pick up on anything unusual that the conglomerate is avoiding.
There was an anomaly in Berkshire's 10-Q filing for the third quarter of 2024. The company reported having executed $2.9 billion worth of stock buybacks in the first nine months of the year. Interestingly, this amount was the same as the one revealed in the Q2 filing. Buffett decided against purchasing Berkshire shares in Q3.
Berkshire's policy states that Buffett can buy back shares whenever he thinks the share price is below Berkshire's intrinsic value. The only condition is that the company's cash, cash equivalents, and U.S. Treasury Bill holdings cannot fall below $30 billion. Buffett has consistently opted for stock buybacks since the third quarter of 2018 – until now.
So, what's Buffett's coded tip-off to Wall Street in this case? Buffett probably believes that share valuations are overpriced, even for Berkshire Hathaway.
Buffett's bold signal
All public companies must reveal their key financial results every quarter. Investors usually focus on revenue and earnings. However, another crucial financial metric is the company's cash position.
Berkshire Hathaway's cash position holds significant importance. Why? The company has a substantial equity portfolio. When Berkshire possesses a large amount of cash, it suggests that Buffett can't find many viable businesses to invest in (either through full acquisitions or partial stock purchases).
You've probably guessed where I'm heading. Berkshire's cash reserve, comprising cash, cash equivalents, and U.S. Treasuries, stood at an astonishing $325.2 billion at the end of the third quarter. This figure represents the biggest cash stockpile in the company's history.
In his 2021 annual letter to Berkshire shareholders, Buffett wrote, "Berkshire's current 80%-or-so investment in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for long-term holding." He added that he and his longtime partner, the late Charlie Munger, had "experienced similar cash-heavy positions from time to time in the past" but those times were "never enjoyable."
Now for the punchline: Berkshire's cash position at the end of 2021 was only around 45% the size of its present cash position. Buffett's unspoken warning with this monumental cash hoard is consistent with his subtle warning. He thinks stock prices are too high.
What should investors do?
Many investors often review their investments at the end of the year. That's sensible for minimizing taxes. What should investors do as 2025 approaches in light of Buffett's advice to Wall Street? I believe that the best strategy is the same one Buffett is implementing.
First, don't lose your cool and sell all your stocks. Although Buffett has been a net seller of stocks for eight consecutive quarters, Berkshire still holds a massive stock portfolio worth approximately $1.1 trillion.
Second, sell any stocks for which you don't have high confidence. You might even consider reducing your positions in stocks that have grown beyond an acceptable percentage of your overall portfolio. For instance, Buffett has sold significant portions of Berkshire's stake in Apple, which once accounted for nearly half of the conglomerate's portfolio.
Third, build your cash reserves. You don't have to emulate Buffett exactly but having more cash available when stock valuations are inflated is wise.
Fourth, keep buying stocks of outstanding companies that trade at fair prices. Despite his cautious and unsubtle warnings about inflated stock prices, Buffett is still discovering a few stocks that meet his criteria. You can likely do the same.
In light of Buffett's large cash hoard, which is significantly larger than the company's cash position at the end of 2021, it can be inferred that he believes the current stock prices are overvalued, suggesting a potential investing opportunity once prices adjust.
Given Buffett's decision to not engage in stock buybacks during the third quarter of 2024, investors might consider following his lead by reviewing their portfolios for potential overvalued stocks and consider selling or reducing positions in overweighted stocks, while also maintaining a sufficient cash reserve to take advantage of any potential market corrections.