Warren Buffett Didn't Buy Shares of His Favorite Stock For the First Time in 25 Quarters, Which Is Telling (and Worrisome) for Wall Street

Among billionaire money managers on Wall Street, few if any garner as much attention as Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) Warren Buffett -- and it's not hard to understand why. Since becoming CEO of Berkshire in the mid-1960s, he's led his company's Class A shares (BRK.A) to an aggregate return of almost 5,500,000%, and practically doubled up the annualized total return, including dividends, of the S&P 500 (SNPINDEX: ^GSPC).

Investors look to the Oracle of Omaha for nuggets of wisdom on the U.S. economy, generalized investment philosophy, and stocks to buy. Thanks to Form 13F filings with the Securities and Exchange Commission, investors have been able to track, and even mirror, Warren Buffett's trading activity for decades.

However, this documented trading activity of late appears to foreshadow trouble on the horizon for the stock market.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Warren Buffett didn't buy his favorite stock for the first time in over six years

Based on what Form 13Fs, Form 4s, and Berkshire Hathaway's third-quarter report tell us, Warren Buffett and his investment aides, Todd Combs and Ted Weschler, are overseeing a roughly $285 billion portfolio at Berkshire Hathaway that contains more than three-dozen securities. Berkshire's top investment holdings include tech stock Apple, credit-services provider American Express, and money-center giant Bank of America.

While there have been a select few stocks the Oracle of Omaha has spent billions of dollars buying recently, such as property and casualty insurer Chubb and integrated oil and gas stock Occidental Petroleum, there's one stock that Buffett has spent considerably more of his company's cash buying than all other holdings... and it's not even close.

Warren Buffett's favorite stock to buy, which isn't going to be found in Berkshire Hathaway's 13Fs, is (drum roll) shares of his own company.

Before July 2018, Berkshire's chief was only allowed to undertake stock buybacks if shares of his company fell to or below 120% of book value. Unfortunately, Berkshire's shares never reached this line-in-the-sand threshold, which meant not one penny was put toward buybacks.

On July 17, 2018, Berkshire Hathaway's board amended the rules governing buybacks to give Warren Buffett an opportunity to reward his company's shareholders. The board set no ceiling or end date on Berkshire's buyback program as long as the company has at least $30 billion in combined cash, cash equivalents, and U.S. Treasuries on its balance sheet, and Buffett views his company's shares as intrinsically cheap.

During the June-ended quarter, Buffett oversaw the repurchase of $345 million worth of his company's shares, which brought the cumulative amount spent on buybacks since July 2018 to almost $78 billion.

But something interesting happened in the September-ended quarter. For the first time in 25 quarters (since July 1, 2018), not one penny was spent buying back Berkshire Hathaway's stock.

Stocks -- including Buffett's own company -- are historically pricey

To be fair, this wasn't the only eyebrow-raising finding from Berkshire's third-quarter report. Based on the company's cash flow statement, $34.59 billion more in stocks were sold in the September-ended quarter than were purchased. This marks the eighth consecutive quarter that Warren Buffett and his team have sold more stocks than they've purchased, with the aggregate total of these net sales now topping $166 billion.

With Buffett freezing share repurchases, at least for one quarter, and continuing to pare down his company's $285 billion portfolio, the takeaway couldn't be clearer: Stocks are pricey and value is virtually nonexistent.

The Oracle of Omaha's favorite valuation metric, which divides the Wilshire 5000 Index into U.S. gross domestic product (GDP), has achieved its highest reading in history, when looking back more than a half-century. This "Buffett Indicator" topped out near 140% during the dot-com bubble, hit 193% before the 2022 bear market, and is currently closing in on 200% to GDP.

S&P 500 Shiller CAPE Ratio data by YCharts.

It's a similar story when looking at the S&P 500's Shiller price-to-earnings (P/E) ratio, which is also referred to as a the cyclically adjusted P/E ratio, or CAPE ratio. The Shiller P/E is based on average inflation-adjusted earnings over the prior 10 years.

The S&P 500's Shiller P/E closed at 36.46 on Nov. 1, which is more than double its average of 17.17, when back-tested to January 1871. With the exception of the dot-com bubble, where it peaked above 44, and the first week of 2022, where it briefly topped 40, we've never witnessed a higher valuation multiple assigned to stocks.

The same holds true for Berkshire Hathaway's stock, which was priced at a 60% to 70% premium to its book value throughout much of the third quarter. It's been 16 years since Berkshire's stock was regularly this pricey, relative to its book value.

With Berkshire's cash pile reaching an all-time high of $325.2 billion, the message is loud and clear that stocks are pricey and these valuations are, in all likelihood, unsustainable over the long run.

Image source: Getty Images.

Patience and perspective are the Oracle of Omaha's chief allies

But there is a silver lining amid Warren Buffett's historic selling spree. History shows that the Oracle of Omaha's willingness to be patient and maintain his long-term perspective has paid off handsomely for Berkshire Hathaway and the company's faithful shareholders.

Buffett has always been a fan of keeping things simple and wagering when the odds are in his favor. Even though we can't predict when stock market corrections will materialize, how long they'll last, or how steep the ultimate decline will be, what we do know is that economic downturns, like stock market corrections, are historically short-lived.

The reason Buffett has, on a number of occasions, cautioned investors not to bet against America is because most recessions are resolved in less than a year. By comparison, there have been two periods of growth for the U.S. economy since World War II ended that endured for at least 10 years. Wagering on the U.S. economy to grow over time has undeniably made the Oracle of Omaha richer.

The same can be said for Wall Street. In June 2023, researchers at Bespoke Investment Group released a data set that compared the average calendar-day length of 27 separate bear and bull markets in the benchmark S&P 500 since the start of the Great Depression in September 1929. While the average bear market stuck around for just 286 calendar days (about 9.5 months), the typical bull market was sustained for 1,011 calendar days, or 3.5 times as long.

Even though Warren Buffett is struggling to find value in a pricey market, it doesn't mean he'd bet against America. He remains an unabashed long-term optimist, and it's only a matter of time until some of Berkshire's $325.2 billion treasure chest gets put to work.

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Bank of America and American Express are advertising partners 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 recommends Occidental Petroleum. The Motley Fool has a disclosure policy.