Today's Focus Shifts Away from the Stocks Buffett Buys; the Attention lies in the Share he's Recently Ceased Acquiring
The significant day of the fourth quarter has arrived, second only to Election Day and the announcement of Social Security's annual cost-of-living adjustment (COLA). No data release is thought to be as significant for investors as quarterly Form 13F filings.
A 13F is a filing mandatory for institutional investors managing over $100 million in assets, due 45 days after the end of a quarter (in this case, Nov. 14). These filings provide detailed information about the stocks that Wall Street's sharpest and most successful financial managers have bought and sold in the previous quarter (in this instance, the third quarter).
While numerous influential asset managers have left their mark on Wall Street, none are held in such high regard as Berkshire Hathaway's CEO, Warren Buffett, affectionately known as the "Oracle of Omaha". Over the past six decades, since taking the helm, Buffett has nearly doubled the average annual return, including dividends, of the benchmark S&P 500.
Investors eagerly await Berkshire Hathaway's 13F, which will be released after market close today. Although the primary interest lies in the stocks Buffett and his top investment advisors, Todd Combs and Ted Weschler, are buying, the main focus today revolves around the one stock Buffett is suddenly refraining from purchasing.
Buffett did not purchase shares of his favorite stock for the first time in over six years
In each of the last eight quarters (Oct. 1, 2022 through Sept. 30, 2024), Buffett has sold more stocks than he's bought, totaling $166.2 billion. This unusual buying pattern has brought Buffett's selective investments into sharper focus.
What makes Buffett's investment choices noteworthy is that his favorite stock to buy won't be included in Berkshire's 13F. Instead, the buying activity of this "favorite stock" will only be outlined in Berkshire Hathaway's quarterly operating results, close to the executive certifications.
Buffett's favorite stock to buy (dramatic music playing) is none other than shares in his own company, Berkshire Hathaway.
Prior to July 2018, Berkshire's shares could not be bought back unless the stock was trading at or below 120% of its book value. Since the stock never fell below this threshold, Buffett was unable to utilize any of Berkshire's cash for buybacks.
However, on July 17, 2018, Berkshire's board amended buyback rules, granting Buffett and his longtime associate, Charlie Munger, more flexibility to repurchase their company's shares. These new rules had no limit or expiration date, as long as Berkshire Hathaway possessed at least $30 billion in cumulative cash, cash equivalents, and U.S. Treasuries.
For 24 consecutive quarters (a period of six years), Buffett purchased Berkshire Hathaway shares, amounting to approximately $78 billion. However, during the September-ended quarter, for the first time since the rules were amended, Buffett did not purchase shares of his favorite stock.
This is a significant story that overshadows Buffett and his team's recent stock purchases, and signals potential concerns for Wall Street.
Buffett's dissatisfaction with historically high stock valuations cannot be overlooked
Buffett's decision to refrain from buying Berkshire Hathaway shares, despite his company's substantial cash pile ($325 billion), suggests that one of Wall Street's most ardent value investors is having trouble finding value. Berkshire's price-to-book value recently reached levels that have not been consistently observed since 2008.
While the stock market as a whole is more expensive than Berkshire's stock, most investors rely on the price-to-earnings (P/E) ratio to determine if a stock is undervalued or overpriced. However, the P/E ratio may not be an effective valuation tool for growth stocks or during shock events (such as lockdowns during the early stages of the COVID-19 pandemic).
A more comprehensive tool for evaluating stock valuations is the S&P 500's Shiller P/E ratio, also known as the cyclically adjusted P/E ratio, or CAPE ratio. Unlike the traditional P/E ratio, which only considers the previous 12 months' earnings, the Shiller is based on average inflation-adjusted earnings from the past 10 years. It smooths out the impact of shock events, facilitating fair valuation comparisons.
As of the end of trading on Nov. 11, the S&P 500's Shiller P/E stood at 38.29, more than twice its historical average and the highest closing value during the current bull market. More importantly, this is the third-highest reading during a continuous bull market in recorded history.
Businesses have had an easier time borrowing, making acquisitions, and innovating due to prolonged periods of low interest rates over the past 3 decades. This, coupled with the internet's arrival in the mid-90s breaking down information barriers, resulted in robust business growth and investors being more open to higher valuation premiums.
However, this pattern of high valuation premiums hasn't been kind to Wall Street. Only six times throughout its 153-year history has the Shiller P/E of the S&P 500 exceeded 30 during a bull market. Post these five past instances, the S&P 500 and other significant stock indexes experienced a drop of 20% to 89% from their highest points.
It's important to note that the Shiller P/E doesn't provide any insight into when market peaks will occur. Stock valuations can stay extended for significant periods, such as before the dot-com bubble. Regardless, it's a recurring sign that generally foreshadows challenges for Wall Street.
Warren Buffett might not favor the Shiller P/E as his preferred valuation method, but his investment behaviors hint at the stock market's current expensive nature and the scarcity of value opportunities. Even though Buffett maintains his positive long-term outlook for the U.S. economy and stock market, he seems to be signaling bumpy waters might be on the horizon.
Investors are closely watching Buffett's decision not to purchase shares of Berkshire Hathaway, his favorite stock, in the recent quarter, as this could signal potential concerns for the market. The high price-to-book value of Berkshire Hathaway, which Buffett's company has not seen since 2008, might be making it difficult for Buffett to find value investing opportunities.
Buffet's choice to refrain from purchasing Berkshire Hathaway shares, despite the company's substantial cash pile, highlights the challenging environment for finance and investing, where finding undervalued stocks might be difficult, even for a seasoned investor like Buffett.
