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Warren Buffett sends a silent warning to investors

The Motley Fool logo The Motley Fool 8/7/2019 Sean Williams
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Warren Buffett is arguably the greatest investor of our time. With around $10,000 to his name in the mid-1950s, the Oracle of Omaha, as he's now known, has grown his net worth to more than $84 billion. And, mind you, this is a modest figure, given the tens of billions of dollars Buffett has generously given to charity over the years. If not for his ongoing philanthropic contributions, he might very well dethrone Amazon CEO Jeff Bezos as the richest man on Earth.

Buffett, who has helmed conglomerate Berkshire Hathaway as its CEO for almost 50 years, is an interesting case. Whereas every method under the sun has been seemingly tested to beat the stock market and get rich, Buffett has done so by simply focusing on value, buying solid companies, and hanging onto them for very long periods. Coca-Cola and Wells Fargo, for example, have been staples of the Berkshire Hathaway investment portfolio for more than 30 years. And with the book value of Berkshire Hathaway gaining 1,091,899% since 1965 (through Dec. 31, 2018), who's to argue with his performance? 

When Buffett speaks, Wall Street listens

Not surprisingly, this has created quite the following for the Oracle of Omaha. Every year, when Berkshire Hathaway hosts its annual stockholder meeting, tens of thousands of shareholders, enthusiasts, and press alike, descend on Omaha, Nebraska, to hear Buffett's latest musings on stocks, the economy, and Berkshire's performance. Aside from Berkshire's more than $212 billion investment portfolio, the conglomerate also owns more than five dozen businesses in an array of sectors and industries, with a core focus on finance. 

Suffice it to say Buffett is an investing icon -- and he's often known for his bullish stance on the economy and long-term outlook for businesses. Here's just a small snippet of some commonly quoted Buffett blurbs:

  • "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
  • "Someone's sitting in the shade today because someone planted a tree a long time ago."
  • "When we own portion of outstanding businesses with outstanding managements, our favorite holding period is forever."

This confidence in the U.S. economy, and in the stock market gaining value over the long run, has defined Buffett's approach to value investing for decades.

However, Buffett's words and his actions have been at odds for a while, and it just might be a silent warning that investors should take note of.

Buffett's inaction is a warning to investors

Last weekend, Berkshire Hathaway released its second-quarter operating results, which featured, among other highlights, a record $122.4 billion in accumulated cash and cash equivalents. While cash is king, this isn't the case for an investment company like Berkshire Hathaway that aims to put its capital to work in companies that it views as lucratively valued. Whether it's making direct investments in businesses, or acquiring them outright, as Berkshire has done dozens of times before, this cash pile, in Buffett's own previous words, would be better off closer to $30 billion. 

So why has Berkshire's cash level risen to an all-time record? The simple answer is that Buffett and his team haven't made a needle-moving purchase since acquiring Precision Castparts about 3.5 years ago. Buffett has made clear that the only acquisitions he's interested in are those that'll move the needle for megacap company Berkshire Hathaway.

While this is perfectly sound reasoning for not having pulled the trigger on any major deals, it's also a silent warning to investors that Buffett and his team don't see any intriguing values at the moment. Another way of rephrasing this statement: Stock market valuations aren't attractive.

And it's not just Buffett's growing cash hoard that's been doing the talking. Berkshire Hathaway was a net-seller of equities during the first quarter, and according to Investor's Business Daily was an even steeper net-seller of stocks during the second quarter. That's exceptionally uncharacteristic of Buffett, who is known for his long-term approach to investing. 

Furthermore, Berkshire Hathaway also decreased its share buybacks during the second quarter, despite previous rumblings that it could get more aggressive on the buyback front. The company repurchased $400 million shares of its own stock in Q2, down from $1.7 billion worth of shares in the sequential first quarter.

In other words, all of Buffett's actions would appear to suggest that the Oracle of Omaha doesn't view the stock market as all that attractive right now. Of course, that's nothing Buffett would ever come out and say. But his actions are speaking much louder than his words at the moment, and investors would be wise to take note.

John Mackey, the CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool has the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares). 

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