16 years have passed since Buffett behaved like this. What does he know that we don’t?

When the world’s most popular investor doesn’t feel comfortable investing, should we all be worried?

Warren Buffett, who joked that the holding periodHis name in the stock is “Forever”, significant amounts are still invested in American companies. But he never took that much off the table – a whopping $325 billion in cash and cash equivalents, mostly in the form of government bonds.

To appreciate the enormous scale of the hoard This, take into account that it will allow Berkshire to write a check, and it will still have a surplus, for the purchase of all corporations listed in the US, except for the 25 with the highest value – iconic companies such as Walt Disney, Goldman Sachs, Pfizer, General Electric or In addition to allowing dividends and interest to accumulate on its balance sheet, in recent months the conglomerate has aggressively sold two of its largest holdings, Apple and Bank of America.

Does this mean investors should be cautious about the market? Maybe, but it tells us even more about Berkshire.

He took precautions in the past as well

Buffett and his late business partner, Charlie Munger, did not outperform the stock market by 140 times through market timing. Mann’s most famous quoteGer is probably his first rule about letting money work: “Never disturb it unnecessarily.” Investors who follow Berkshire closely and hope that some of its magic will rub off on their portfolios pay attention to what it buys and sells, but much less to when it does so.

And Buffett, seemingly optimistic and patient, has taken precautions in the past as well. He famously closed his most successful partnership in 1969, when he said the markets were too turbulent, and also hoarded considerable amounts of cash in the years leading up to the global financial crisis – money he used opportunistically.

“He’s aware of the fact that markets tend to move in cycles and reach extreme points,” says Adam J. Mead, a New Hampshire money manager and “pathologist” and author of the book “The Complete Financial History of Berkshire Hathaway.”

The fact that stock values ​​are inflated does not mean that they are on the verge of a crash or even on the verge of a bear market. Instead, look at the bigger picture, and see what today’s valuations say about returns over the next few years, whichThere will be good and bad times. Goldman Sachs strategist David Kostin recently predicted that the return of the S&P 500 over the next decade would average only 3% per year – less than a third of the post-war rate.

At a time when investors are feeling especially optimistic, Costin’s report didn’t get much attention, but it’s in line with other forecasts. Asset management giant Vanguard recently predicted a 3% to 5% annual return range for U.S. large-cap stocks. and only 0.1% to 2.1% for growth stocks over a decade. And Prof. Robert Shiller’s cycle-adjusted price-to-earnings ratio corresponds to an average return of about 0.5% per year after inflation – similar to Costin’s forecast.

And then there’s the even simpler “Buffett indicator,” which the Oracle of Omaha once called “probably the best measure of where valuations are at any given moment.” There are different versions of the subject, but it is basically the ratio between all listed stocks and the size of the American economy. If we take the Wilshire 5000 as representative, it is now at 200%, which would leave it at an even higher value than at the peak of the tech bubble.

Will be happy to spend the cash

With government bonds now yielding more than the expected return on stocks, Buffett seems to have taken as many tokens off the table as there is no advantage in risky stocks. But publicly he says he’d be happy to spend the cash.

“What we really want to do is buy great businesses,” he said at Berkshire’s 2023 annual meeting. “If we could buy a company for $50 billion or $75 billion, $100 billion, we could do it.”

Now that Berkshire is worth a trillion dollars, it would take a deal of this magnitude to move the needle. He immediately explains that a transaction that would be compatible with acquisitions such as the Burlington Northern Santa Fe transaction in 2010 or the purchase of the insurance company General Re in 1998, would be worth 100 billion dollars in values ​​corresponding to today’s balance sheet.

Could it also mean that Buffett sees value in maintaining liquidity ahead of the next crisis or general market turmoil? Yes, but he doesn’t say that, and individual investors also have more options than he does. First, we don’t have to pay a premium of 20% or more over the market price to invest in the business, as Berkshire would in a takeover. We can also sail in much shallower water and smaller pools. For example, Vanguard’s 10-year forecasts range from 7% to 9% per year for non-US developed market stocks and 5% to 7% for US small cap stocks. Apart from a very profitable bet on trading companies Japan In recent years, Buffett has kept his money mostly in the country, and will probably continue to do so.

Changes in Berkshire – inevitable

However, changes at Berkshire are inevitable – and not just because the 94-year-old is nearing the end of his amazing career. Buffett has not hesitated to return cash to shareholders in the past, almost exclusively through share buybacks, but it’s clear that he thinks even his own stock is too valuable for that.

Berkshire has also reached a size where it cannot replicate its long-term record of spreading its profits and beating the market. It will have to return money in some way – probably through a dividend, Mead believes. In the end there will be no choice but to hinder the money from working.