Warren Buffett Just Told Us The Market Is Overvalued And He Sees Few Good Investments

Warren Buffet has all but told us at the Berkshire Hathaway Annual Meeting in Omaha that the market is overly expensive and unattractive.

Berkshire Hathaway’s cash position has reached a new high. It sold a portion of its largest holding, Apple, to buy U.S. Treasury Bills. And Warren Buffet has all but told us at the Berkshire Hathaway Annual Meeting in Omaha that the market is overly expensive and unattractive.

OK, Buffett didn’t actually say that. He doesn’t like talking down the market explicitly and I can understand that. It might encourage incorrect behavior among retail investors since timing the market is likely to be hazardous for their wealth.

However, the combination of his actions and his avoiding answering the question about whether the market is very expensive tells you all that you need to know about his view.

Sure, he might have sold a portion of his Apple investment because of some hypothetical future capital gain tax increases. That’s possible. Or he could have sold it because it’s a high-quality but mature company trading at over 25x profits that is currently showing declining revenues and has a low probability of anything but modest growth in the future given its size. You decide which explanation is more likely.

Buffett was asked whether, given that the valuation of the S&P 500 is at a similar level to that seen in 1999 when he had commented on how expensive it was, he thinks it’s similarly overvalued now. Rather than addressing the question directly, he reverted to repeating his usual stories about how he approaches buying businesses, avoiding the question. Usually, when someone answers a different question than the one being asked that is very informative in and of itself.

He also mentioned that he no longer remembers all the years in the stock market. That might be true. However, I would bet that he does remember 1999, which is when he had a strong sense that the market was vastly overvalued and yet chose to hold on to overvalued stocks like Coca-Cola which has produced annualized returns over the next 25 years of about 5%. Could that mistake perhaps be informing his decision to now reduce his similarly expensive Apple investment in favor of 5% T-bills that include a very valuable option to invest in future attractive opportunities when they become available?

Warren Buffett isn’t “timing the market.” Neither should you. Rather, he has an absolute value approach to investing, which stands in sharp contrast to most people’s relative value approach. He has told us repeatedly that his minimum threshold for an investment is a 10% pre-tax annualized return in a business that he understands well. If nothing fits his criteria, then he waits for future opportunities. That is exactly what he is doing now.

So why is the best investor in the world not finding opportunities and increasing his cash holdings while most other investment managers’ portfolios are full of stocks? Not just any stocks, but most of them hold the very large, well-known “blue chip” companies that Berkshire Hathaway could easily buy if it thought them to be attractive? I am going to give you a few possibilities, and you decide which of them are likely to be the answer.

• Could it be that Buffett is too old and has lost his investment prowess? Few people are as sharp in their 90s as they were in their earlier decades, but all indications point to him being very coherent and highly focused on investing. What’s more, he has hired two experienced value investors to assist him who are roughly half his age. You can rest assured that the three of them have given at least some consideration to every single company of size in the U.S. That the result is a portfolio with few investments and rising cash holdings speaks of their conclusion that they aren’t finding much that fits both their qualitative criteria and is sufficiently undervalued.

• Could it be that most investment managers aren’t driven by absolute returns they will generate for their clients but by how much money they make for themselves from the business of managing others’ money? Few clients would blame a manager for holding the usual mix of well-known household name companies. The managers can always use the excuse that “the customer already made the asset allocation decision, now it’s our job to be fully invested.” As long as the returns aren’t too different from the pack and the investment managers’ marketing is on point, he is likely to retain most of his clients and keep collecting their fees no matter what the returns turn out to be. So, could most managers’ portfolios be so different from Buffett’s because their goals are so different?

• Could there be plenty of opportunities in the market that just happen to reside in companies that are outside of Warren Buffett’s circle of competence? That’s possible since he is well known for avoiding rapidly changing industries or those with unproven economics. He also doesn’t usually like to buy a very expensive business already discounting a lot of future growth and bet on it growing even faster than the rate reflected in his purchase price. So, we certainly can’t rule out that there are plenty of opportunities out there that don’t fit what he does but could be a fit for others.

• Could Buffett have better emotional self-control and discipline than other market participants? It’s hard sitting on the sidelines while others are making money. The last prolonged period of stock market pessimism in the U.S. was 15 years ago. Many have either forgotten what that’s like or weren’t professionally investing back then. So, could it be that in a version of what poker players call “fancy-play syndrome” they have convinced themselves that they are clever enough to find difficult-to-spot opportunities and genuinely believe them to be attractive investments while Buffett is waiting for his “fat pitches”?

Which of the above best explain the huge gap between how Buffett and most other investors are acting in the current market environment? Does it even matter? After all, you shouldn’t be doing or not doing something because of what Warren Buffett does or doesn’t. You should always think for yourself, from first principles, and make the best decisions that are right for you.

However, let’s say you were playing a game of chess and were excited about how it was going. And a Grandmaster looks at your position, shakes his head and says “ouch, this is a tough one.” Wouldn’t that give you at least some caution and prompt you to consider that perhaps you missed something important in your own analysis? Well, consider that the World Champion of Investing has just looked at the market, winced, and all but said “ouch, this is a tough one.”

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About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.