Warren Buffett has a 70-year track record of producing market-trouncing returns for anyone willing to invest alongside him.

His Buffett Partnership Ltd. produced an annualized return of 31.6% from 1957 through 1968, while the Dow Jones Industrial Average compounded at a rate of 9.1%. He ultimately folded BPL into Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which he took over in 1965, continuing to produce returns that left the rest of the market in the dust. Through 2023, Buffett’s increased the value of Berkshire shares at an average rate of 19.8%, versus 10.2% for the S&P 500 in that period.

So, when Buffett makes an investment decision, the whole world pays attention. Buffett’s made several big decisions during the past few quarters regarding Berkshire’s investment portfolio. They all add up into a significant warning for stock investors, indicating there’s not a lot to like in the stock market right now.

Buffett’s amassed a cash and Treasury bill position that approached $300 billion in the third quarter. There are several factors pushing Buffett’s cash position to new records. Here’s how we got here, and what it means for investors.

Image source: The Motley Fool.

Buffett can’t stop selling stocks

Buffett has sold more in stocks than he bought in each of the past seven quarters. The Oracle of Omaha made his biggest stock sale in history last quarter, when he cut Berkshire’s position in Apple (NASDAQ: AAPL) by about half of its remaining stake, or about $73 billion. Total equity sales through the first half of 2024 were $97 billion, while he made just $4.3 billion in new purchases.

The stock sales keep coming. Although we don’t have final Q3 numbers yet, Securities and Exchange Commission filings indicate Buffett sold a large portion of Berkshire’s investment in Bank of America (NYSE: BAC). Through Sept. 24, he sold $9 billion worth of shares.

Buffett has said that the decision to sell portions of Berkshire’s investments in stocks like Apple or Bank of America is based on the idea that corporate tax rates will rise when the current tax law expires at the end of next year. Berkshire is sitting on enormous unrealized capital gains for both stocks, which have climbed considerably from Berkshire’s original purchase prices from 2016 through 2018.

But Buffett’s selling decision also implies that he thinks those stocks trade near or above their intrinsic value. If he thought they were undervalued, he’d be willing to pay higher taxes later to own an undervalued asset today.

That sentiment can broadly explain why Buffett has been less active on the purchasing side of the portfolio as well.

Buffett’s not even buying his favorite stocks

Buffett’s favorite stock to purchase during the past few years, by far, has been Berkshire Hathaway itself. He’s consistently bought back shares of the stock since the board of directors updated the repurchase authorization in 2018. Buffett now has the opportunity to buy back shares whenever he feels the stock is priced below its intrinsic value.

But last quarter’s repurchases slowed to a snail’s pace, totaling just $345 million. In June, Buffett elected not to buy any shares at all. And based on Berkshire’s reporting in July, it doesn’t look like he made any stock repurchases to start Q3. Considering Berkshire stock has since, for the most part, traded well above the levels it traded for in June and July, it’s unlikely Buffett made significant repurchases in Q3.

Another favorite stock of Buffett’s for the past few years is Occidental Petroleum (NYSE: OXY). Buffett has been invested in the oil and gas company since 2019, when he acquired $10 billion in preferred shares of the company. He’s gone on to buy 29% of the company’s common stock, which means he has to file a disclosure with the SEC whenever he buys or sells shares of the company. But no such disclosures have materialized since June. That’s despite the stock falling to new lows amid declining oil prices.

The cash is piling up fast

With $9 billion in gross stock sales from Bank of America alone during the quarter and limited capital deployed toward new stock purchases or buybacks, Berkshire’s cash position is climbing quickly. As of the end of the second quarter, Buffett was already sitting on $277 billion in cash and Treasuries.

When you add in the operating cash flow from Berkshire’s core operations of about $10 billion plus the interest earned on Berkshire’s existing Treasury holdings, the cash position at Berkshire could easily top $300 billion. The one factor that might stop it from reaching that milestone is the estimated tax bill it had to pay this quarter on the huge stock sales Buffett executed earlier this year.

At this point, cash and Treasuries are approaching 50% of Berkshire Hathaway’s investable assets. That’s before you include the $169 billion in insurance float available to invest as well.

Buffett is showing a clear preference for safe assets and doesn’t even like the valuation of his own company right now. The warning is clear for stock investors: There’s not much to like in the stock market — at least, not for Berkshire Hathaway’s portfolio.

Should you follow Buffett’s lead?

Remember, most individuals aren’t managing a $600 billion investment portfolio. It’s harder to maneuver a large ship than it is to steer a tiny speedboat. Buffett also has the challenge of producing above-market returns for shareholders. What’s the value in buying Berkshire Hathaway stock if investors could effectively get the same returns from an S&P 500 index fund?

That is to say a lot of large-cap stocks that make up the investable universe for Berkshire Hathaway are unattractive at today’s prices. That might even include Berkshire Hathaway stock itself. Buffett’s lack of recent share repurchases suggests as much, at least.

But the investment universe is much larger for individual investors. Smaller stocks look particularly attractive from a valuation standpoint and could benefit from forthcoming interest rate cuts and growing money supply during the next few years.

While investors shouldn’t ignore Buffett’s warning, it’s important to understand the implications. Just because Buffett doesn’t have a lot of great investment options right now doesn’t mean smaller investors can’t put their money to work in the stock market.

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