This Is Why Buffett Is Sitting on a Record $381 Billion

Past performance isn’t a reliable indicator of future results.

To put that in perspective, that's enough money to hand out roughly $1,500 to every American. In the last quarter alone, he sold about $6 billion worth of stocks. That marks 12 straight quarters, Buffett has been a net seller, his longest stock selling streak in decades.

At the same time, US stock markets are hovering near record highs powered by frenzy around AI. Over the past three years, the S&P 500 has climbed more than 80% while the tech heavy NASDAQ has surged over 120%. Yet Buffett chooses to remain on the sidelines. Considering that Birksher's core business is to invest in allocate capital, many investors are wondering if Buffett is sending a final message before his retirement.

Looking back, this isn't the first time Buffett has stayed on the sidelines while the markets got carried away. In the late 1990s, Buffett began building up cash at Berkshire, even as the stock market kept raising higher, much like he's doing today. But when the .com bubble burst in 2000 and wiped out trillions in market value, his patience looked like foresight.

He did the same again in 2007 as the housing bubble pushed the stock market to new highs. Birksher's cash pile quietly climbed. Then came the global financial crisis. The S&P 500 plunged nearly 60%. Buffett bought the dip, deploying billions into new investments during 2009 and 2010 when prices were at their lowest.

And more recently in 2021, Buffett's cash allocation was near a record high just before the market peaked and slid into a 20% decline. Once again, he used that downturn to selectively add to positions.

You can really see the results of Buffett's decision in this chart

It tracks Birkshshire Hathway's performance versus the S&P 500. When the line rises, Birkshere is outperforming the market. When it falls, it's lagging behind. And notice how the three periods we mentioned earlier, 2001, 2008, and 2022, all coincide with times when Berkshire outperformed the broader market.

To many, it seems Buffett has an uncanny ability to step aside just before market bubbles burst. That reputation is what made him the oracle of Omaha and why investors across the globe study his every move. And today, many of the same indicators he's watched for decades are now flashing similar signal.

The first signal Buffett watches is market valuation

The excitement around AI has pushed overall market valuations to some of the highest levels on record. One way to see this is through Buffett's favorite measure, often called the Buffett indicator. It measures the total value of the US stock market compared to the GDP.

Right now, it sits at above 200%. In simple terms, the market is worth more than twice the size of the entire US economy. If we adjust this chart to show how far it's moved from its historical trend, the picture becomes even clearer.

Going back to 1950, there have only been a handful of times when the Buffett indicator has been this elevated. In 2021, at the height of the dot mania in 2000 and in the 1960s. In each of those cases, Buffett preferred to stay cautious. And today, this indicator is right back in that zone.

Buffett's caution might also come down to how concentrated the market looks today. Today, the 10 largest companies in the S&P 500 make up almost 40% of the entire market value, an even greater share than during the late 1990s .com boom. When so much of the market depends on just a few companies, it can make the market more fragile.

Another key metric Buffett watches is something called the earnings yield

It tells us how much a company earns for every dollar invested in its stock. Right now, the S&P 500's earnings yield is around 3.2%. It's lower than the return on cash with three-month treasury bills yielding close to 4%. In other words, investors are being paid more to hold cash than to own stocks. A setup that usually means equities are expensive relative to safer assets.

Of course, not everyone shares Buffett's cautious view. Other prominent investors like Tom Lee and analysts at Goldman Sachs argue that we're not yet in bubble territory. They believe there's still room for markets to climb even at these elevated valuation levels because underlying business fundamentals remain strong and earnings growth continues to justify higher prices.

And history also gives their case some weight. Back in 1998, the Federal Reserve decided to cut interest rates to stabilize the economy. And the .com rally went on for another 2 years before finally peaking. Lower rates make borrowing cheaper and push investors toward riskier assets like stocks, which often drives markets higher.

We could be seeing a similar setup now with the Fed cutting interest rates again, which means markets can stay elevated for longer before Buffett or his successor Greg Abel finds the kind of discount they're waiting for.

Ultimately, Buffett's philosophy has never been about timing bubbles

He said many times that he's never made an investment decision based on a prediction. Instead, he sticks to data, valuation, and patience. As he often reminds investors, the stock market is a device for transferring money from the impatient to the patient.

He and Greg Abel are prepared to wait, even if it takes years, until real opportunities return.

At Capital.com, we'll keep tracking how the world's top investors are positioning themselves in this rapidly changing AIdriven market. Explore more insights in our Educational Hub.

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