In a famous Arthur Conan Doyle story, “The Adventure of Silver Blaze,” Sherlock Holmes draws the attention of Scotland Yard’s Inspector Gregory to the “curious incident of the dog in the night-time.” Gregory, though, says the dog did nothing in the night-time. “That was the curious incident,” Holmes responds.
Now we’ve just had a curious incident with Warren Buffett. There are few investors whose every move is dissected by the public more than the Oracle of Omaha. Because of a brilliant track record over six decades that generated returns greater than 4.3 million percent, it is understandable why his every stock buy and sale is scrutinized.
Yet in the third quarter, we had the curious incident of what Buffett didn’t do, and that may be more telling than all the things he did.
24/7 Wall St. Key Points:
- Warren Buffett has been signaling he thinks the market is getting a bit frothy.
- He has been selling more stocks than he’s been buying and has built up a $325 billion war chest.
- There was an even more telling sign made by Buffett, who suddenly stopped buying the one stock he’s bought every quarter for over six years.
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Building up a buffer
Buffett made a number of high profile stock sales in Q3. According to Berkshire Hathaway‘s (NYSE:BRK-A)(NYSE:BRK-B) 13-F filing with the Securities & Exchange Commission, the Oracle continued selling down his massive stake in Apple (NASDAQ:APPL).
Where the tech giant once accounted for nearly half of Buffett’s portfolio, after the latest quarterly filing where he sold off another 25% of his holdings, Apple now represents less than a quarter of the total.
Buffett also sold down Bank of America (NYSE:BAC), too. For years he rarely touched this stock, but last quarter he slashed his position by nearly 23%, which allowed it to slip from his second-largest holding to third-largest.
More recently, though, he raised some eyebrows by buying Occidental Petroleum (NYSE:OXY) stock five times in one week.
Yet he’s sold far more stock than he’s bought, but sometimes it’s the thing you don’t do that is most telling. And it was the fact Buffett didn’t do anything with this one stock that makes it a curious decision.
Ignoring his favorite stock
Over the past five years, Buffett has bought this one stock more times than any other stock Berkshire Hathaway owns. Every single quarter for 25 consecutives quarters, the Oracle of Omaha didn’t miss an opportunity to pick up more shares of this company that he knows better than all others. Except last quarter. He didn’t buy a single share, which ought to make investors wonder why.
That stock, of course, is Berkshire Hathaway itself. Now, it’s not traditional stock purchases like those of Apple or Bank of America. Rather, he is buying back shares and Buffett has been repurchasing Berkshire stock hand over fist. He spent some $78 billion on the stock since he began buying it six years ago.
It should be noted that before 2017, Buffett didn’t buy back any shares of Berkshire Hathaway. That’s because he couldn’t. It would have required the stock to fall to 120% of its book value before he was able to repurchase shares.
However, in July of that year, Berkshire’s board changed the rule to allow Buffett to buy back stock if he and the late-Charlie Munger agreed the stock was trading below its intrinsic value. So long as Berkshire holds at least $30 billion worth of cash, equivalents, and Treasury bills, he had a green light to buy.
Key takeaways
Buffett has been building up a cash hoard. With all the stock sales he’s made, Berkshire Hathaway’s cash balance stands in excess of $325 billion. Coupled with not buying his own company’s stock, it seems clear the Oracle is worried about valuations.
The S&P 500 trades at price-to-earnings valuations not seen since the dot-com bubble of the 2000s. Berkshire Hathaway also trades near record valuations. Buffett moves are saying he is having difficulty finding his way to the bargain basement bin in this frothy market.
It might not be a bad idea to have plenty of powder dry for when the market crash comes. When that dog finally does bark, you will want to be like Buffett and be ready to jump in and begin buying.
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