The bull market has roared higher in recent weeks, adding to two years of double-digit gains for the S&P 500. Encouraged by a lower interest rate environment and the performance of growth stocks, investors have flocked to equities and chosen players in high-potential industries like artificial intelligence (AI) and technology in general.
Even though this is positive, investors still worry about what may happen next, especially since gains have left the S&P 500 trading at record valuations. The momentum may slow or even stop at some point, leading to declines. In these times, as investors wonder about what may happen next, they often turn to an expert for advice. And the biggest one may be Warren Buffett, who, as chairman, led Berkshire Hathaway to a compounded annual gain of nearly 20% over 59 years. That largely beats the S&P 500’s performance of 10%.
Buffett’s recent actions could be seen as a warning to Wall Street. He’s been a net seller of stocks quarter after quarter and, in the most recent period, closed positions in two exchange-traded funds (ETFs) that track the performance of the S&P 500: the SPDR S&P 500 ETF Trust and the Vanguard S&P 500 ETF.
This could be seen as a big bet against the market. But for a clear answer about whether Buffett is fleeing stocks — and what he plans to do in the future — it’s important to consider 18 words he wrote in his latest shareholder letter. Let’s take a look.
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Buffett’s latest moves
First, though, let’s consider some of Buffett’s and his team’s latest moves — moves that could suggest he’s fleeing stocks. In a shareholder letter written last year, the billionaire had already noted the “casino-like” behavior that had become increasingly present in the market.
Meanwhile, Buffett surprised investors by reducing his positions in stocks he’s considered favorites: Apple and Bank of America. Though Apple remains Berkshire Hathaway’s biggest position, he cut the holding by 67% last year and reduced Bank of America by 34%.
On top of this, Berkshire Hathaway has been a net seller of stocks for nine straight quarters. The company said in its annual report that it spent $9.2 billion to acquire equities in 2024 and received more than $143 billion from the sales of stocks. As a result of these moves, Berkshire Hathaway’s cash level has reached a record of more than $334 billion.
The value of equity holdings at the end of the year stood at about $267 billion. So, in light of all this, it’s unsurprising that some Buffett watchers may wonder whether the top investor is turning his back on stocks. Now, let’s take a look at the 18 words from Buffett’s 2024 shareholder letter released on Feb. 22 that clarify the situation.
Relying on American businesses
“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities,” Buffett wrote. “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses.” Buffett went on to say that he’s relied on solid American businesses for his success and will continue along that path.
This message doesn’t reflect a desire to walk away from the stock market. Rather, it reinforces Buffett’s past statements about his belief that good American companies will drive the market higher over the long run.
Buffett didn’t say why he sold certain stocks this past year or was more of a seller than a buyer. But considering the billionaire’s focus on value, I would expect him to lock in some gains at a particular point during a bull market and hold back on buying stocks when the market is at one of its most expensive levels. The S&P 500 Shiller cyclically-adjusted price-to-earnings (CAPE) ratio, a valuation measure that looks at stock prices and earnings over time, recently reached beyond 37 — it’s only done that twice since the benchmark’s launch as a 500-company index in the late 1950s.
S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically-adjusted price-to-earnings ratio.
So, what does all this mean for you as an investor? Buffett is neither fleeing stocks nor advising other investors to do that. Instead, it looks as if the Oracle of Omaha, as he’s often called, may be behaving as he’s done throughout his successful investing career: He’s being cautious at a time when valuations are high, selectively buying when he sees a quality stock at a reasonable price, and setting aside cash to invest as new buying opportunities arise.
This is a smart strategy all of us can follow, and like Buffett, it may help us to score a huge investing win over the long term.
Bank of America is an advertising partner of Motley Fool Money. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.