The renowned investor and CEO of Berkshire Hathaway, Warren Buffett, has been warning about the stock market’s “casino-like” tendencies. In 2024, Buffett and his team amassed an unprecedented amount of cash, exceeding $320 billion in cash, cash equivalents, and short-term U.S. Treasury bills by the end of Q3. Additionally, Berkshire sold significantly more stock than it acquired, notably offloading substantial portions of its two largest holdings: Bank of America and Apple.
Over the first three quarters of 2024, Berkshire’s equity security purchases totaled just $5.8 billion, while its sales reached a staggering $133.2 billion. Buffett monitors the ratio of stock market capitalization to gross domestic product (GDP) to assess whether the stock market is undervalued or overvalued. This metric has recently crossed 200%, indicating an overvaluation in the market.
Nonetheless, there is a positive aspect. Since mid-December, Berkshire has resumed its stock buying activities, investing in several firms such as Occidental Petroleum and Sirius XM Holdings. These transactions were primarily expansions of existing stakes, implying that Buffett and his team still identify potential opportunities in the prevailing market landscape.
Last year, market breadth was underwhelming, as a handful of high-flying technology and artificial intelligence stocks propped up the market. In 2024, 174 stocks in the S&P 500 finished the year with losses, while 348 stocks lagged behind the index’s 23% increase. All of Berkshire’s recent acquisitions considerably underperformed the index last year and possess forward price-to-earnings ratios (P/E) below 25.
Buffett warns about speculative investing
This serves as a reminder for investors that opportunities persist, particularly with value stocks that might withstand any market downturn better, given that investors already hold modest expectations. Buffett has also critiqued online trading platforms for fostering rapid-profit speculation, which he believes could incite market panics.
He linked the surge in speculative investments to the democratization and gamification of trading enabled by online trading apps. Buffett’s observations illustrate the shift in investment dynamics in the digital era. While these platforms have improved accessibility, they have simultaneously triggered a wave of speculative trading, which could lead to significant market volatility and potential losses for those who fail to undertake adequate research.
In a recent interview, Joel Greenblatt underscored Buffett’s valuable analogy comparing stock investments to owning businesses. Greenblatt pointed out that if an individual sold a business and carefully evaluated local firms to invest in eight thoroughly researched companies, this would be considered a wise decision. However, when applying this same methodology to stocks, many people often view it as dangerous due to daily price swings and market perceptions.
Greenblatt reaffirmed that concentrating investments in well-researched prospects is a sensible approach, be it in stocks or actual businesses. He confronts the prejudice against concentrated stock investing by supporting Buffett’s viewpoint on the subject. Buffett’s counsel serves as an essential reminder for investors to maintain discipline and concentrate on the long-term value of their investments.
As Greenblatt highlights, investing in thoroughly researched businesses, whether through stocks or direct ownership, represents a sound strategy that should not be overshadowed by transient market volatility.
