Are Buffett’s recent moves an indication that you too should consider selling your stocks?
Warren Buffett’s company, Berkshire-Hathaway (BRK.A -0.18%) (BRK.B -0.03%)is known for its ability to find value in the markets, so when the company buys a stock, many investors often follow because they are convinced that Buffett or the other Berkshire managers have seen significant value gains there.
On the other hand, investors might become concerned if they don’t see much buying activity and Berkshire’s cash balance is instead growing. They might interpret this trend as a sign of cause for concern in the markets. And if Berkshire’s cash balance is indeed increasing, should investors be worried about the stock market?
Is this a good time to sell your stocks and wait for better economic conditions?
Berkshire’s cash holdings reach new record
It’s no secret that Berkshire Hathaway’s cash balance is growing. Every quarter, the company releases a report on its cash and short-term investments, and in the past Buffett has indicated that he wouldn’t be surprised if the balance continued to grow. And indeed, it has – as of June 30, cash balance stood at a record level of around $277 billion.
This sharp increase in Berkshire’s cash came after the company sold shares in several companies, including Apple And Bank of AmericaThe technology company and iPhone manufacturer Apple used to account for almost half of Berkshire’s holdings. Today it is a more modest 29% of all investments.
Is this a sign that Buffett is worried about the markets?
Selling shares in some of its top investments might seem alarming to investors, especially given recent concerns about a recession. The economic situation is worsening, and the Federal Reserve is now expected to cut interest rates in the near future. The question is how much and how many cuts there will be, not whether there will be any at all this year.
But Buffett has a history of investing in stocks during worse and more worrying times (even wars). He doesn’t sell based on economic conditions or forecasts. His sale of Apple stock, for example, may have more to do with worries about rising capital gains taxes and the impact that might have on Berkshire’s shareholders than anything else. There’s no indication that he suddenly thinks Apple has become a worse company to invest in or that it has somehow lost its competitive edge and ability to dominate the market. After all, it’s still the top holding in Berkshire’s portfolio.
It is notable that despite the sales of Apple and, to a lesser extent, Bank of America shares, Berkshire is simply holding on to its cash holdings; it is not taking large positions in new companies. It has Ulta Beauty into its portfolio, but for the most part, Berkshire has not bought shares of other companies. This could be a sign that Buffett does not see any major buying opportunities at the moment, perhaps because valuations have become too high.
Apart from 2020, which was an unusual time in the markets due to the emergence of COVID-19, S&P500 seems to be trading at a pretty high price today. And if that weren’t the case, I would certainly have expected Buffett to buy up even more shares with all the cash he has on hand.
Investors should not ignore valuations when selecting stocks
Even if you’re optimistic about a company’s long-term prospects, that doesn’t mean you should ignore its valuation. A stock trading at a high premium may mean it’ll take a while to get a good return on your investment because investors have already factored much of the future growth into the valuation. There is also only a minimal, if any, safety margin that is associated with stocks trading at high premiums.
Investors shouldn’t try to time the market right or wait for Berkshire to make big moves before deciding to buy shares. However, it would be wise and sensible to consider the premium you might pay for a stock before adding it to your portfolio. If it seems too high, it might be better to put the investment on a watch list rather than buying it.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. David Jagielski does not own any stocks mentioned. The Motley Fool owns and recommends Apple, Bank of America, Berkshire Hathaway, and Ulta Beauty. The Motley Fool has a disclosure policy.