Warren Buffett Sells Key Investments: A Cautionary Sign for Investors

The recent selling actions of Warren Buffett, the CEO of Berkshire Hathaway, raise significant concerns for Wall Street and individual investors alike. Known as the "Oracle of Omaha," Buffett's investment decisions are closely monitored, making any signs of caution noteworthy.

For many Americans, February 14, or Valentine’s Day, is a chance to express love and appreciation to their partners. However, for the investment community, it marks an important day: the deadline for filing Form 13F, which reveals the investments of institutional money managers with assets of at least $100 million.

Berkshire Hathaway’s 13F filing is one of the most anticipated among these disclosures. With nearly $299 billion in assets under management, Buffett has consistently outperformed the S&P 500 over his six-decade leadership.

Buffett Exits Two Historically Safe Investments

In the recent quarter ending December, Buffett, along with his top advisors, Ted Weschler and Todd Combs, took decisive action. They made several adjustments to Berkshire’s portfolio, including adding to five existing positions, making one new purchase, reducing nine holdings, and completely selling off three investments.

While some investors are likely focused on larger moves—like the continued selling of shares in Bank of America—the more significant development is Berkshire's complete exit from the Vanguard S&P 500 ETF and SPDR S&P 500 ETF Trust. These index funds are designed to mirror the S&P 500, and although they weren't huge positions, together they represented just over $45 million in market value.

Historically, these funds have been considered reliable investments for long-term growth. Buffett previously recommended owning an S&P 500 index fund as the best option for most investors.

Research from Crestmont has shown that holding an S&P 500 index fund leads to profit over a 20-year period, with all 106 rolling 20-year periods since 1900 yielding positive returns. This indicates a strong historical backing for these investments, making Buffett's decision to sell them particularly shocking.

The Warning Signs of Market Conditions

This abrupt move to divest from two well-regarded index funds reflects a broader theme of selling from Buffett. Despite his long-standing optimism about the U.S. economy, he has sold more stocks than he has bought for nine consecutive quarters. Since October 2022, he has sold $166.2 billion more in stocks than he has purchased.

During a recent annual meeting, Buffett suggested that the low corporate income tax rate motivated him to realize some unrealized gains, notably in Apple. However, it seems more likely that Buffett is acting on the principle of caution, as he famously advised to be "fearful when others are greedy."

The stock market is currently exhibiting one of its highest valuations in the last 154 years, according to the cyclically adjusted price-to-earnings (CAPE) ratio, which stands at 38.54 as of February 14. This is significantly above the long-term average of 17.21 and has historically indicated that market downturns may follow when valuations reach such heights.

Furthermore, the Buffett Indicator, which compares the total market capitalization of public companies to U.S. GDP, recently peaked at 207%. Historically, such high readings suggest that the market may be overvalued, reinforcing the idea that controlling exposure and taking profits is a prudent course of action.

It’s alarming that Buffett has divested from these traditionally reliable investments, primarily because he views the current market as too expensive with limited opportunities for value investing. Nevertheless, he often capitalizes on market dips, using temporary downturns to deploy his cash effectively. As it stands, Buffett retains substantial cash reserves to navigate through the next market corrections.

This set of actions serves as a time for reflection among investors, urging them to consider Buffett's mantra seriously: be cautious in times of high market enthusiasm.

Warren, Buffett, Investments