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Market Signal: Buffett’s Rare Stock Sales Stir Concerns

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Traders and investors alike have long considered following Warren Buffett’s stock picks a winning strategy. The “Oracle of Omaha” has a proven track record of making shrewd investments through his holding company, Berkshire Hathaway (BRK.A, BRK.B). For those seeking exposure to Buffett’s carefully selected portfolio, buying Berkshire shares offers an all-encompassing opportunity—gaining access to both the company’s operating businesses and its stock holdings.

Berkshire Hathaway’s performance speaks for itself. Over the past 12 months, Berkshire shares have delivered an annualized return of 32%, outperforming the S&P 500 by a wide margin. Over longer periods, Berkshire continues to outpace the benchmark, with returns of 19% over the last three and five years, 13% over ten years, and 14% over fifteen years. Even more striking is Berkshire’s performance from 1965 through 2023, with an average annual return of 20%, which doubles the S&P 500’s return over the same period.

Buffett’s Focus on Avoiding Mistakes

One of the key tenets of Buffett’s investment philosophy is the importance of avoiding costly errors. As Buffett noted in his annual letter to shareholders in February, “Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been—and will be—rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”

However, Buffett now faces a significant challenge: what to do with Berkshire’s massive $277 billion cash reserve, as of June 30. Acquiring companies with such a large sum won’t be easy. “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” he remarked.

Kass’s Analysis: Buffett’s Recent Stock Sales

Doug Kass, a seasoned hedge fund manager and columnist for TheStreet Pro, recently analyzed Buffett’s impact on the stock market, particularly in light of his recent moves. Kass recalls Buffett’s famous New York Times column in October 2008, when the legendary investor called for buying U.S. stocks amid the financial crisis. Buffett famously advised, “Be fearful when others are greedy, and be greedy when others are fearful.” Five months later, the market began a robust recovery that has largely continued.

Yet, Kass highlights a change in Buffett’s stance. In recent months, Buffett has been selling stocks—an unusual move for someone known for his long-term “buy and hold” philosophy. Specifically, Berkshire Hathaway has reduced its holdings in Apple (AAPL), its largest single position, and Bank of America (BAC). Since mid-July, Berkshire sold $6.2 billion worth of Bank of America shares and about $90 billion worth of Apple stock in the first half of the year.

What’s Behind the Sales?

These actions have raised eyebrows among market watchers. Kass suggests that selling “forever” holdings like Apple and Bank of America is atypical for Buffett. The rapid unloading of nearly half of Berkshire’s Apple position during the second quarter is significant. “It’s a stark contrast to his market view when he was accumulating equities 16 years ago,” Kass observes.

The steady divestment from Bank of America has led Kass to speculate that Buffett’s outlook on the global economy and capital markets may be more bearish than his public statements suggest. Kass points out, “Most likely, the [Apple and B of A] stock sales relate to a much more ursine economic and market view than Warren is saying out loud.”

Kass also notes that Buffett’s favored stock market indicator—the market capitalization-to-GDP ratio, often referred to as the “Buffett Indicator”—has been signaling overvaluation for months. This ratio, which compares the total value of all publicly traded stocks to the nation’s gross domestic product, is a metric Buffett has used historically to assess whether the market is undervalued or overvalued.

Conclusion: Is Buffett Signaling a Market Shift?

For traders and investors, Buffett’s recent moves could be a crucial signal. Kass suggests that it might be time to reconsider exposure to U.S. equities, as indicated by his twist on Buffett’s 2008 advice: “It might be time to Sell American, He Is.” With Berkshire Hathaway’s recent stock sales and a sizable cash reserve waiting to be deployed, the market could be poised for significant shifts. Keeping a close eye on Buffett’s next steps may be more important than ever.