Few investors have the ability to command the attention of Wall Street professionals and everyday investors quite like Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett. The reason is simple: He's crushed Wall Street's benchmark indexes over a span of nearly six decades.
Since taking the reins in the mid 1960s, the Oracle of Omaha has overseen a cumulative return for his company's Class A shares (BRK.A) of almost 5,500,000%. Buffett's ability to identify plain-as-day value and use time as an ally has been his not-so-subtle wealth-building formula for decades.
However, what Buffett does over shorter timelines doesn't always align with the long-term ethos that he and his late right-hand man, Charlie Munger, instilled at Berkshire Hathaway.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Warren Buffett has aggressively sold shares of Bank of America since mid-July
Let me preface this discussion by stating as plainly as possible that the Oracle of Omaha strongly believes in the American economy and would never bet against it. Though he realizes that economic recessions are both normal and inevitable, he's learned over his many decades that downturns are short-lived. Buying stakes in time-tested businesses with strong management teams has historically worked in the favor of Berkshire Hathaway's shareholders.
But if you were to take a closer look at Berkshire Hathaway's recent Form 4 filings with the Securities and Exchange Commission (SEC), you'd be left scratching your head.
Beginning on July 17, Buffett began overseeing the methodical selling of his company's more than 1.03-billion-share stake in money-center goliath Bank of America(NYSE: BAC). From July 17 through Sept. 10, there have been 39 trading sessions (including the Labor Day holiday). Form 4 filings show that Buffett has been a seller of BofA stock in 27 of these sessions, including 12-consecutive trading days from July 17 to Aug. 1, as well as Aug. 23 to Sept. 10. Cumulatively, close to 174 million shares have been disposed for a total market value that's approaching $7.2 billion.
Financials are Buffett's favorite sector to put Berkshire's money to work in, and Bank of America has been his unquestioned favorite bank stock to own for years. So, what gives?
One completely benign possibility is that this selling activity is tax-related. During Berkshire Hathaway's annual shareholder meeting in early May, Buffett offered his opinion that corporate tax rates are likely to climb in the years to come. He believes that investors will appreciate Berkshire's investment team for locking in some of the company's unrealized gains at a lower tax rate.
When Buffett made this comment, he had sold close to 13% of his company's stake in Apple in the March-ended quarter. During the second quarter, this remaining stake was effectively cut in half. Selling close to 174 million shares of BofA might be a way of locking in sizable unrealized gains at a lower tax rate.
It's also possible that a bank-savvy Buffett is front-running an expected shift in the Federal Reserve's monetary policy. All signs continue to point to the Federal Open Market Committee kicking off a rate-easing cycle when it meets next week. Not only have stocks underperformed this century following the start of rate-easing cycles, but Bank of America is the most interest-sensitive of America's money-center banks. Rate cuts will adversely impact its net interest income more than any other bank.
While these are both logical reasons to sell a 17% stake in BofA, the truth behind Buffett's persistent dumping of Bank of America stock may be more ominous for Wall Street.
Image source: Getty Images.
Buffett wants nothing to do with "casino" mentality or a historically pricey stock market
Though Warren Buffett would never bet against America or short-sell securities, it doesn't mean he has to purchase or hold stocks when visible warning signs appear.
The writing has been on the wall for some time that the Oracle of Omaha isn't happy with equity valuations. In each of the previous seven quarters (Oct. 1, 2022 to June 30, 2024), Buffett has been a net seller of stocks to the cumulative tune of $131.6 billion. The aggressive selling of Bank of America stock over the last eight weeks puts Berkshire Hathaway on track for an eighth straight quarter of net-equity sales.
While Buffett hasn't explicitly said that this selling activity is due to unattractive stock valuations, he did have harsh criticism for the "casino-like behavior" he's witnessed on Wall Street. In his latest annual letter to shareholders, Buffett had this to say:
Though the stock market is massively larger than it was in our early years, today's active participants are neither more emotionally stable nor better taught than I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.
Buffett isn't wrong. The internet has democratized access to information and made buying and selling equities easier, and cheaper, than ever. Further, historically low lending rates for much of the last decade have encouraged risk-taking by everyday investors. It's been a perfect storm of temptations.
The end result is one of the priciest stock markets on record.
S&P 500 Shiller CAPE Ratio data by YCharts.
There are a lot of ways to measure "value" on Wall Street -- but few do as comprehensive of a job as the S&P 500's Shiller price-to-earnings (P/E) ratio. The Shiller P/E is also referred to as the cyclically adjusted price-to-earnings ratio, or CAPE ratio.
The most common measure of value that investors lean on is the traditional P/E ratio, which divides a company's share price into its trailing-12-month earnings per share (EPS). The downside to the P/E ratio is that it can be adversely impacted by one-off events or economic shocks.
Meanwhile, the Shiller P/E is based on average inflation-adjusted earnings from the previous 10 years. Analyzing a full decade of earnings history ensures that one-off events don't skew the results.
As of the closing bell on Sept. 11, the Shiller P/E was nearing 36 and had hit 37 earlier this year. There have only been two other times since 1871 where the S&P 500's Shiller P/E ratio has been higher -- prior to the dot-com bubble bursting and during late 2021/early 2022. Following both of these prior instances, the benchmark S&P 500 shed 49% and 25% of its value, respectively.
The stock market is historically pricey right now. While Buffett's exorbitant selling in Apple and Bank of America may be, to some degree, tax-related, it appears much more likely that he'd rather have abundant cash at the ready in the event of an emotion-driven stock market plunge.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
