Billionaire investor Warren Buffett is well-known for his ability to identify and invest in great businesses at attractive prices. However, in a surprising move, Buffett chose not to buy back shares of his company, Berkshire Hathaway, in the third quarter, despite holding a substantial cash reserve of over $320 billion. This decision, as outlined in the company’s latest filing with the Securities and Exchange Commission, marks the first time in six years that Buffett has refrained from repurchasing shares.
During Q3, Berkshire Hathaway actually sold off stocks, including millions of Apple and Bank of America shares, as well as most of its Ulta Beauty holdings. This move has raised questions among investors about whether Berkshire Hathaway’s stock may be overvalued. CFRA Research analyst Cathy Seifert suggested that the lack of share buybacks could be a signal that the stock is trading above its intrinsic value, potentially deterring other investors from purchasing shares.
Despite Berkshire Hathaway’s Class A stock trading at approximately 1.6 times its book value in early November, Buffett has typically stated that he would only buy back shares if the price fell below the company’s intrinsic value, as conservatively determined. The company had previously set a threshold of not repurchasing shares if they were trading over 1.2 times their book value, but this policy was abandoned in 2018.
Buffett’s decision to maintain a significant cash position has also sparked speculation about his views on the broader market. With Berkshire Hathaway accumulating cash for nine consecutive quarters, the company’s cash reserves ballooned to $320.3 billion in Q3. A large portion of this cash, approximately $288 billion, is invested in short-term Treasury bills, indicating a cautious approach to investing in the current market environment.
NYU Stern School of Business professor Aswath Damodaran suggested that Berkshire Hathaway’s hesitance to repurchase its own shares could indicate concerns about the market being overvalued. Similarly, AJ Bell analyst Russ Mould noted that Buffett’s reluctance to buy back shares while accumulating cash may reflect worries about the economy and the stock market, hinting at a more risk-averse stance.
The “Buffett Indicator,” a metric devised by Buffett that compares the total US stock market capitalization to the latest quarterly US GDP estimate, recently reached 198.1%, suggesting that US stocks may be significantly overvalued. Buffett has previously warned against buying stocks when the indicator approaches 200%, as it did in 1999 and 2000, indicating potential market bubbles.
In conclusion, Warren Buffett’s decision not to buy back Berkshire Hathaway shares despite holding a substantial cash pile and the company’s stock trading at a premium to its book value has raised questions about the current market valuation and Buffett’s outlook on the economy. Investors should conduct their own analysis and seek professional advice before making investment decisions, as markets are subject to risks and past performance may not predict future returns.
