Warren Buffett is up to something

Warren Buffett is up to something, and I think we should take notice.

He is selling stocks and hoarding cash at a level we have only seen once before in the last 40 years. The last time Berkshire Hathaway's cash position was as high as today was in 1988. Here is an excerpt from Warren Buffett's 1988 letter to shareholders, where he answers the question of why Berkshire had not redeployed the cash:

“Why haven't we found more companies that satisfy our tests? The answer is not sloth. It lies instead in the hyperactive nature of the acquisition market... Too-high purchase prices frequently destroy the profit potential of acquisitions. And in large deals, where the prices paid are particularly preposterous, the financial damage can be remarkably long-lasting." - Warren Buffett, 1988 letter to shareholders

Warren first began buying Apple in 2016 and continued through 2019 when its trailing price-to-earnings ratio was around 10%. However, by early 2019, Apple's stock price and P/E ratio had increased to about 18%, with Warren likely making average purchases at a P/E of 14 to 15%.

Today, Apple is trading at 39 times trailing earnings, despite its earnings growth being stagnant since 2022.  An appropriate valuation for a mature, large, liquid stock in an environment where interest rates are at 4.75% on the 10-year and inflation still untamed, a P/E ratio of 10 is fair, and 15 is generous. A P/E of 39 for Apple with stagnant earnings is impossible to justify by any traditional financial metric. Warren's actions suggest he believes the price is too high and is willing to sell, even if it means incurring taxes, which he loathes. If Warren wants to hold cash instead of Apple, I don’t want to argue with him.

Next week, I will discuss another reason why I believe Warren is selling. Until then, be safe out there….