Buffett’s move is not unusual. He seems to think the U.S. stock market is overheated.

Buffett’s move is not unusual. He seems to think the U.S. stock market is overheated.

Berkshire Hathaway’s cash share is 28.3 percent, the highest ever, and Buffett’s index is also the highest ever at 204.6 percent. Berkshire’s share buybacks have also been suspended.

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“I’m increasing cash.” This man’s sudden change…3 reasons to pay attention

At a Berkshire Hathaway shareholders’ meeting in May 2022, a shareholder once asked a question about Warren Buffett’s “market timing.”

“Looking back, you had excellent market timing. You came out of the market in 1969 and 1970 and went back into 1972 and 1974, when the stock was really low, and you did that in 1987, 1999 and 2000. Now the stock is going down, and you have a lot of cash. How do you choose when to buy?”

Buffett said with a smile, “I have no idea what the stock price will be like in the future, and I have never thought about buying and selling based on market forecasts,” adding, “People appreciate their market timing because their optimism hit the mark in 2008 when everyone was pessimistic about the market.”

Buffett soon confessed that he invested about $15 billion in gum makers Wrigley and Goldman Sachs between September and October 2008, and it was a disadvantageous time. After falling to the 6000 mark in March 2009, the Dow Jones only began to bottom and rise.

Buffett’s market timing may be slightly different in the short term, but the mid- to long-term trend is relatively accurate. Let’s take a look at Warren Buffett’s three signals warning of overheating in the U.S. stock market, which is at a new all-time high.

1. Berkshire Hathaway’s Cash Share Hits Record High At 28.3%

Berkshire’s cash holdings, led by “Omaha’s wise man” Warren Buffett, have reached a new all-time high. Berkshire said in its third-quarter report (FORM 10-Q) on the 2nd that its cash holdings have increased to $325.2 billion. The figure is $48.3 billion higher than the previous quarter ($276.9 billion).

Berkshire sold half of its shares in Apple in the second quarter and sold about 25% of its remaining shares in the third quarter, plunging its stake in Apple from about 900 million shares to about 300 million shares at the end of last year. Berkshire also continued to sell Bank of America shares, cashing out a total of 34 billion dollars worth of shares in the third quarter alone.

It is natural that Berkshire’s cash reserves grow because it has continued to grow. However, the fact that the share of cash in Berkshire’s total assets has reached an all-time high is something we need to point out.

On August 6, Bloomberg columnist Jonathan Levine said Berkshire’s sale of Apple in the second quarter increased its cash holdings to $276.9 billion, accounting for 25% of its total assets. He pointed out that the cash share exceeding 24.5% recorded at the end of June 2005 should be viewed as a warning to the market.

Berkshire’s cash reserves rose to 325.2 billion U.S. dollars in the third quarter, accounting for 28.3 percent of its total assets. The figure is the highest level since 1990. “Some in the market take Berkshire’s rising cash share as a sign that Buffett is preparing for a stock market crash,” said columnist Levin.

2. Buffett’s Index is also at an all-time high of 204.6%

Buffett’s favorite “Buffett Indicator” also hit an all-time high of 204.6 percent, sending a signal that the stock market is overheated. The Buffett index refers to the ratio of the total market capitalization of a stock market divided by its gross domestic product. Buffett became famous when he mentioned in an interview with U.S. business magazine Fortune in 2001 that it is the best measure to measure the right level of stock prices.

According to the U.S. investment information media Guru Focus, as of November 7, the market capitalization of the Wilshire 5000 stock index for all U.S.-based stocks was $60.576 trillion and the U.S. GDP was $29.349.9 trillion, with the Buffett index calculated through it being 204.6%.

Given its historical valuation, Guru Focus divided the Buffett index into five sections: less than ①84%: marked undervaluation ② 84% to 108%: undervaluation ③108 to 132%: appropriate stock price ④132 to 156%: over valuation ⑤156%: markedly overvalued.

The 20-year average of Buffett’s index is 119.83%, and it once plunged to the 50% range during the 2007-2008 global financial crisis, but has since risen steadily. The Buffett index has also reached an all-time high as the S&P 500 index and Nasdaq index have reached record highs since former President Donald Trump was elected as the 47th president in the U.S. presidential election on the 5th.

3. Berkshire’s share buyback also halts as PBR rises 1.58x

The last indicator is Berkshire’s share price net asset ratio (PBR). Berkshire Hathaway’s stock price continued to rise to the point where its market capitalization once exceeded $1 trillion at the end of August. Berkshire A shares closed at $688,252 on the 7th.

Instead of paying dividends, Berkshire buys treasury stocks with cash on hand to raise the company’s value when it thinks Berkshire’s stock price is undervalued. However, in the third quarter, Berkshire stopped buying treasury stocks for the first time since 2018 as Berkshire’s stock price continued to rise. Berkshire previously poured $2.6 billion into buying treasury stocks in the first quarter, but it was significantly reduced to $345 million in the second quarter.

Berkshire has only bought back its own shares when the PBR is below 1.2 times since 2011, and changed its 2018 purchase criteria to below the company’s intrinsic value. Berkshire PBR plunged to 0.91 times when the global stock market crashed in late March 2020 due to the COVID pandemic, but has since maintained the level of 1.2 to 1.4 times. This year, Berkshire shares continued to rise, exceeding 1.6 times and reaching 1.579 times on the 7th.

Berkshire said in its third-quarter report that “Buffet will buy back its own shares when it believes the price of its own shares is below Berkshire’s conservatively valued intrinsic value.” It can be guessed that Buffett now thinks Berkshire’s stock price exceeds its intrinsic value.

Buffett believes the U.S. stock market is overheated right now