Investing in the stock market right now: What Buffett's doing and should you follow?
Investing in the stock market right now: What Buffett's doing and should you follow?
In a chat reminiscent of the 1996 narrative, former Fed Chairman Alan Greenspan's "irrational exuberance" warning echoes in today's market. The S&P 500 Shiller CAPE ratio, a measure of stock market valuation, is sky-high, surpassing levels seen 28 years ago when Greenspan sounded the alarm. Furthermore, the total U.S. stock market value relative to GDP is at an all-time high – a signal of an overvalued market.
Long-time investor Jim Rogers and Stifel's Barry Bannister share the concerns, anticipating an S&P 500 plunge of 26% by 2025. But what's Warren Buffett's take on this period of apprehension? Let's break it down.
Buffett's Unsaid Warnings
Buffett, RF's chairperson, is maintaining an unusually low key when it comes to his views on the stock market's fortunes. Despite the wisdom of staying away from overvalued markets when the Buffett Indicator, a proxy for valuation, surpasses 200%, Buffett exhibits no sense of urgency. Berkshire Hathaway's equity portfolio still hovers around $1 trillion.
Furthermore, Buffett is not trying to call the market's next move. He has consistently acknowledged that he can't predict whether stock prices will rise or fall in the short term. So, what else isn't Buffett doing?
A clear signal of his reservations stems from Berkshire Hathaway's quarterly stint as a net seller of stocks for the eighth consecutive period. This flurry of sell-offs indicates Buffett's wariness about current valuations.
Buffett's Defensive Strategies
So, what is Buffett actually doing in this inflated market? Employing his time-tested strategy. One of his famous quotes highlights the importance of being fearful when everyone is greedy, and being greedy when others are fearful. Buffett's actions are in line with this philosophy.
Instead of fully abandoning the stock market, Buffett is selectively unloading some stocks from his portfolio, such as Floor & Decor Holdings, Paramount Global, and Snowflake. He has also been moderating Berkshire Hathaway's exposure to its largest holdings by decreasing both Apple and Bank of America's stake.
But Buffett's most telling move may have been piling up a cash hoard. Berkshire Hathaway's quarterly cash, cash equivalents, and short-term investments in U.S. Treasuries have reached a staggering $325 billion, a new record.
On the flip side, Buffett has been adding select new stocks to his portfolio, including Domino's Pizza, Heico, and Pool – companies that meet his stringent investment criteria. Although he isn't diving headfirst into the current market, he's still actively looking for value where it can be found.
Is Buffett's Approach Sound?
Some observers might slam Buffett for opting out of the market when it's historically expensive. Others might argue that Buffett is being too reserved. But I believe Buffett's strategy is optimal for his risk appetite and investment philosophy.
Although market valuations are high, the stock market isn't necessarily doomed to correct. Great stocks with strong fundamentals still exist, even when markets are overpriced. Much like catching falling knives isn't smart, neither is selling all of your stocks and abandoning the market completely.
In the end, Buffett's focus on safety, selective selling, and maintaining a sizable cash reserve should position his portfolio well for any potential turbulence. His conservative approach helps mitigate the risks posed by an overvalued market while keeping the door open for attractive investment opportunities.
In light of the market's current valuation, Buffett's approach to investing appears cautious, as evidenced by Berkshire Hathaway's net selling of stocks for eight consecutive quarters. Additionally, Buffett's accumulation of a record $325 billion in cash, cash equivalents, and U.S. Treasuries suggests a financial strategy aimed at preserving capital and taking advantage of potential investment opportunities.