Few money managers hold the attention of professional and everyday investors quite like Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett.
The reason so many investors attempt to mirror Buffett's trades is because he's crushed the benchmark S&P 500(SNPINDEX: ^GSPC) in the return column over a span of almost six decades. Since taking over as CEO, the Oracle of Omaha has overseen an aggregate return in his company's Class A shares (BRK.A) of nearly 5,600,000%!
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Buffett also tends to be an open book who freely shares the characteristics/traits he looks for when investing in "wonderful companies." The willingness of Berkshire's chief to discuss what has and hasn't worked throughout his decades in the investing world has been invaluable.
But every so often, Warren Buffett keeps a secret from Wall Street and his faithful followers. He happens to be holding one of those big secrets right now -- and he's under no obligation to spill the beans to his followers until mid-February.
On rare occasion, Buffett secretly builds up sizable stakes in public companies
Thanks to required quarterly Form 13F filings with the Securities and Exchange Commission (SEC), investors are given an under-the-hood look at what the Oracle of Omaha and his top investment aides, Ted Weschler and Todd Combs, purchased and sold in the most recent quarter. A 13F is what allows investors to effectively mirror Buffett's trades and ride his coattails.
But on three separate occasions since this decade began, Buffett has requested (and been granted) confidential treatment when filing quarterly 13Fs with the SEC. In other words, Berkshire Hathaway has been given a pass from reporting select positions in order to build up its stake without other investors piling in and driving up the share price... which is what often happens when Berkshire discloses a new stake in a company.
In 2020, Berkshire had two positions that were given confidential treatment, which were eventually revealed to be integrated oil and gas giant Chevron(NYSE: CVX) and telecom titan Verizon Communications. Although the Verizon stake was eventually shown the door, Chevron has been a continuous holding for four years.
Even though energy stocks have historically not played a huge role in Berkshire Hathaway's portfolio, Buffett is a big fan of oil stocks and a huge believer in the U.S. economy. Chevron's integrated operating structure allows it to hedge against downside in the spot price of crude oil, yet still allows it to benefit, in terms of a big uptick in operating cash flow, if the price of oil rises. Tight global oil supply following the COVID-19 pandemic has undeniably helped Chevron's bottom line.
The third occasion where Buffett kept his buying activity a mystery occurred between July 1, 2023, and May 15, 2024. In mid-May, when Berkshire filed its 13F detailing the company's trading activity for the first quarter, it was revealed that Buffett had taken a sizable stake in property and casualty insurer Chubb(NYSE: CB).
Though the insurance business is far from exciting, insurers typically possess exceptional premium pricing power. The ability to raise premiums on an as-needed basis ensures long-term profitability.
Additionally, insurers like Chubb are benefiting from higher interest rates by investing their float -- the premium collected that isn't paid out in claims -- in ultra-safe short-term Treasury bills. The added interest income from higher yields is providing a lift to Chubb's earnings per share.
Image source: Getty Images.
Warren Buffett has a potentially big secret in the vault
However, not all of Buffett's rare secrets have to do with stocks he's buying.
On July 17, the Oracle of Omaha began paring down his company's stake in Bank of America(NYSE: BAC). We know this, because Berkshire Hathaway is required to file a Form 4 with the SEC disclosing any buying or selling activity in BofA. A Form 4 is a necessary filing for any position where Berkshire holds at least a 10% stake in a public company.
Over the last three months, Buffett has overseen the sale of more than 257 million shares of Bank of America stock, totaling more than $10 billion in market value. This persistent selling activity has pushed BofA down to the No. 3 spot in Berkshire's $316 billion portfolio and elevated "forever" holding American Express to No. 2.
More importantly, the last round of selling on Oct. 10 reduced Berkshire Hathaway's stake in Bank of America to 9.99%. With Buffett's company below the Form 4 filing threshold, he'll no longer be required to report any additional selling activity within a matter of days.
Although Berkshire will be filing its next 13F on Nov. 14, it'll only detail trading activity for the September-ended quarter. Thanks to 15 separate Form 4 filings from Berkshire concerning BofA since July 17, this trading activity has been transparent.
What we won't know is if Buffett undertakes any additional selling of Bank of America's stock from Oct. 11 through Dec. 31. Berkshire Hathaway won't file the 13F detailing fourth-quarter trading activity until Feb. 14, 2025. He legally isn't required to tell Wall Street or investors anything else about his company's BofA position until then.
The Oracle of Omaha's persistent selling of equities appears to be a warning to Wall Street
But the big concern for investors shouldn't be that Warren Buffett can now pare down his BofA stock in secrecy. Rather it's understanding the catalyst that made the Oracle of Omaha a persistent net seller of equities in the first place.
Based on Berkshire's operating cash flow statements between Oct. 1, 2022 and June 30, 2024, $131.6 billion more in stocks have been sold than purchased over this seven-quarter span. Although Buffett opined during his company's annual shareholder meeting in early May that corporate tax rates are likely to climb in the future, there's probably more to his persistent selling spree in Apple, Bank of America, and a few other holdings, than just tax implications.
Despite being a clear proponent of the U.S. economy and stock market, Buffett isn't afraid to sit on his hands when stock valuations don't make sense. At the moment, we're witnessing one of the priciest markets on record, dating back 153 years!
S&P 500 Shiller CAPE Ratio Chart
While there are a lot of ways to measure "value," the S&P 500's Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), does a phenomenal job of making historic apples-to-apples comparisons. The Shiller P/E takes into account average inflation-adjusted earnings over the previous 10 years.
Since January 1871, the average S&P 500 Shiller P/E reading is 17.16. As of the closing bell on Oct. 11, it closed at 37.38, which is a new high for the year and the third-highest reading during a continuous bull market.
Dating back 153 years, there have been only five prior occurrences where the Shiller P/E surpassed 30. Following all five previous cases, eventual peak-to-trough losses for Wall Street major indexes ranged from 20% to 89%.
Warren Buffett's willingness to boost Berkshire Hathaway's cash to an all-time record $276.9 billion is a clear-as-day sign that he sees little to no value on Wall Street right now. This is quite the ominous warning for investors.
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American Express and Bank of America 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, Berkshire Hathaway, and Chevron. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
