The stock market has been picking up steam recently on hopes that the war in Iran may soon come to an end. However, at the end of the first quarter, the S&P 500 was down 4.6%, and many stocks were struggling. But despite the decline in the overall market at the time, Warren Buffett had indicated that he hadn’t seen much of a reason to be all that bullish on stocks.
Although many investors may have believed otherwise, given the recent rally and the S&P 500 hitting new records, the Oracle of Omaha has remained largely cautious with respect to the overall market. But why?
Image source: The Motley Fool.
The dip this year was nothing significant for Buffett, who’s seen greater pullbacks in the past
Buffett has been invested in the stock market for decades, and although stocks briefly fell into correction territory and were down 10% or more from recent highs this year, he said he wasn’t finding anything to buy. Buffett, after all, has seen more significant declines over the years, stating in an interview that, “this is nothing.”
Today’s Change
(-0.38%) $-1.78
Current Price
$472.80
Key Data Points
Market Cap
$1.0T
Day’s Range
$472.22 – $476.04
52wk Range
$455.19 – $542.07
Volume
143K
Avg Vol
4.9M
Gross Margin
23.63%
His company, Berkshire Hathaway (BRKA 0.22%)(BRKB 0.38%), has been loading up on cash rather than buying stocks. Currently, it has more than $370 billion in cash and short-term investments available to pursue investment opportunities, but management clearly isn’t overly excited. While Berkshire has been buying some stocks, it’s been selling a lot more, as the company’s cash stockpile has been rising significantly over the past couple of years.
BRK.B Cash and Short Term Investments (Quarterly) data by YCharts
While Berkshire is technically under a new CEO, Greg Abel, it still takes a similar value-oriented approach to deciding which stocks to buy as it did under Buffett.
Valuations are high, and investors should tread carefully
Entering this week, the S&P 500 has reversed its gains and is now up over 4% since the beginning of the year. For three consecutive years, it has outperformed its long-run average of a 10% gain, and there have been concerns of valuations becoming too high for many stocks. Currently, the average stock on the S&P 500 trades at more than 25 times its trailing earnings. The recent pullback in the markets may have created some modest opportunities, but for a value investor such as Buffett, stocks would need to fall far lower for them to be compelling buys.
Chasing rising stocks can be risky, as they can be vulnerable to significant corrections later on, and so investors should be careful. One of the safer options to consider these days may simply be to invest in Berkshire’s stock, knowing that management will take a cautious approach when picking investments.
