Here's What Warren Buffett's $275 Billion Move Should Tell Investors
The Oracle of Omaha is building up a major cash position and here's how other investors can follow suit.
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Thursday's somewhat-higher-than-expected PPI reading pretty much seals a 25 BPS cut to the fed funds rate at next week’s FOMC meeting.
That might disappoint those who were hoping for a 50 BPS reduction. However, it would be prudent, given that the continuing fight on the inflation front is likely to be challenging, outside of a recession, in my opinion. I still believe the chances of stagflation or what Doug Kass would call "slugflation" remain elevated.
I also continue to not be able to find much value within the overall market at current trading levels. I am hardly alone holding this assessment.
Warren Buffett’s Berkshire Hathaway BRK.B has built up a record amount of cash, now totaling over $275 billion, by selling off the likes of long-term holdings Apple AAPL and Bank of America BAC. The long-term head of the insurance business and vice chairman at Berkshire must believe that even that stock is overvalued, given that he has recently dumped half of his stake in the firm.
Finally, famed billionaire Steven Cohen's Point72 Asset Management hedge fund is rumored to be soon returning billions of dollars to its investors.
I can’t blame these long-time investment stalwarts for being more than a bit cautious around the current market. I find myself in the same boat. The S&P 500 is trading just north of 22-times forward earnings. Which seems extreme, given that I believe forward profit forecasts are optimistic. In addition, I am not sold yet that the Federal Reserve can really pull off a "soft landing." That's a much hoped for scenario, but one that the central bank has failed continuously to achieve over the decades.
From a market-cap-to-GDP ratio perspective, one of the Oracle of Omaha’s favorite valuation metrics, we are in rarified air at nearly a 200% threshold, a level that has never been reached before. The S&P 500 also trades at right near three-times revenues. That level has only been breached once. That was in late 2021 and very early 2022. This occurred right before the big whoosh down in equities in 2022, which shaved a third off of the NASDAQ before the year was done.
Roughly half of my portfolio has been in short-term treasuries for most of this year. However, yields are starting to fall here as the three-month treasury bill now yields just less than 5%. Almost all of the rest of my holdings are within covered-call positions around the few stocks in the market that still sport reasonable valuations. Covered-call positions tend to outperform when the market falls, stays flat or rises slightly. They underperform when equities have a solid rally. Fortunately, I don’t see the scenario on the horizon. A market melt up would also make valuations even more extreme.
I know this is not the most exciting portfolio allocation. However, it has produced a just over 10% return so far in 2024 with much lower volatility than the overall market. That is not nearly as good as the NASDAQ or S&P 500 year to date. It is slightly above that from the equal weight S&P and quite a bit better than the small-cap Russell 2000.
Most importantly, I am very comfortable with this configuration until lower entry points or "fatter pitches" present themselves or until economic conditions improve measurably. The latter scenario I put a very low probability on. And, while I continue to fight off any feelings around FOMO, at least I have good investment company also moving considerable money to the sidelines.
At the time of publication, Jensen had no positions in any securities mentioned.
