The WSJ had an intriguing article about Warren Buffett’s Berkshire Hathaway, and its accumulation of $325B in cash and equivalents (mostly Treasury bills), as a result of selling large portions of several of its biggest stock positions such as Apple and Bank of America. Buffett also failed to repurchase any of Berkshire’s own stock in the most recent quarter, signaling that Buffett doesn’t believe it is trading at a discount to intrinsic value.
While I believe Buffett is clearly thinking very hard about what condition he wants to leave Berkshire in when he ultimately has to step away from the company, so reducing concentrated positions can be logical, based on Buffett’s career history I believe it is certainly a signal that the market is overvalued. Remember that Buffett ran one of the most successful investment partnerships in history but shut it down in 1969 when he felt markets were too overvalued, only to begin his odyssey with Berkshire. The article points out that Vanguard group recently predicted an annual return range for large U.S. stocks of only 3-5% including just .1% to 2.1% for growth stocks over the next decade.
I realize that this type of bearishness might seem insane when stocks and crypto keep hitting new highs, but it is really a function of looking at where valuations are. Valuations are not a good predictor of short-term returns, but they are a good predictor of long-term returns. If you look at Apple for instance, which is an amazing company, the P/E ratio is 37x, versus a 10-year average of 22x. The EV/EBITDA ratio is 26x, versus a 10-year average of 16x. The P/S ratio is 9x versus a 10-year average of 5x, according to Charlie Bilello. With numbers like these, it’s no wonder Buffett reduced his stake, but the stock has continued higher since he sold.
Apple is not alone in trading at stratospheric valuations, as similar metrics can be found in many areas of the market. While Buffett has been investing a lot in Treasury bills, we at TTCM have been taking advantage of the high yields offered on many different types of bonds, including adjustable-rate bonds that protect from increases in interest rates. There is a whole spectrum of attractive options, including AAA loan funds yielding 6.5%, BBB loan funds yielding 8.5%, business development companies trading at a discount to net asset value yielding 13%, etc. These types of investments generate substantial cash flows that can be reinvested or distributed, if you are in the distribution phase of your retirement plan. They benefit directly from the higher yields on offer, and they provide more protection than being 100% long stocks.
The increased volatility has created some exceptional opportunities selling cash-secured puts and covered calls. If Vanguard is correct and stocks only return low single-digits per annum over the next decade, these types of strategies targeting double-digit returns become a massive competitive advantage. Other attractive areas continue to be real estate stocks where we are getting another crack at high dividend yields, after interest rates have creeped up once again. Energy is also one of the cheapest areas of the market, so we have been building positions there too. If you want to protect your portfolio from the next bear market and actually be able to capitalize on the super attractive opportunities that come up, you have to not get demolished, which is why we are focusing so much on protection, while still generating attractive returns in the interim.