Warren Buffett Retires With a $187 Billion Warning to Investors. History Says the Stock Market Will Do This Next.
Key Points
Berkshire Hathaway sold a net total of $187 billion in stock over the last 13 quarters, which suggests Buffett has struggled to find reasonably priced investments.
The S&P 500's CAPE ratio averaged 39.8 in February, a valuation that (apart from the last few months) has not been seen since the dot-com crash in late 2000.
Historically, when the S&P 500's monthly CAPE multiple has exceeded 39, the index has declined by an average of 30% over the next three years.
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This weekend, Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) released its full-year financial report, and it contained a final warning from former CEO Warren Buffett, who retired in December.
Berkshire was a net seller of stock in the fourth quarter, meaning it sold more stock than it purchased. The company has now been a net seller in 13 straight quarters, which suggests Buffett has struggled to find attractive investments in the current market environment.
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Rich valuations are the most plausible culprit. The S&P 500 (SNPINDEX: ^GSPC) is currently so expensive that history says the index could drop 30% in the next three years. Here are the important details.
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Warren Buffett's $187 billion warning to investors
In 2018, Warren Buffett told CNBC, "It's hard to think of very many months when we haven't been a net buyer of stocks." However, the opposite is true today. Warren Buffett and fellow portfolio manager Ted Weschler have been net sellers in 13 straight quarters, with net stock sales totaling $187 billion over that period.
On one hand, Berkshire is much larger today than it was in 2018. The company's tangible book value has more than doubled and currently sits at around $580 billion. That means few potential investments would move the financial needle for the company. Said differently, Buffett and Weschler have had a somewhat limited pool of stocks from which to choose.
On the other hand, Berkshire has regularly purchased some stock since its streak as a net seller started in late 2022. Last year, the company started positions in UnitedHealth Group, Alphabet, and The New York Times. But Buffett and Weschler still sold more stock than they bought in every quarter despite having over $300 billion in cash and equivalents on the balance sheet.
Why is that a warning? That Berkshire's net sales have totaled $187 billion since late 2022 suggests Buffett and Weschler are concerned about elevated valuations across the stock market.
History says the stock market could decline sharply in the next few years
The S&P 500 recorded an average cyclically adjusted price-to-earnings (CAPE) ratio of 39.8 in February 2026. Apart from the last few months, that is the highest reading since the dot-com crash in October 2000. In fact, the S&P has recorded a CAPE multiple of above 39 during only 26 months since it was created in 1957 (which was 829 months ago).
So what? Economist Robert Shiller developed the CAPE ratio to determine whether stock market indexes are overvalued. The S&P 500 has historically performed poorly after recording a monthly CAPE multiple above 39, as shown in the chart below.
|
Holding Period |
S&P 500's Average Return |
|---|---|
|
6 months |
0% |
|
1 year |
(4%) |
|
2 years |
(20%) |
|
3 years |
(30%) |
Data source: Robert Shiller.
Here's what the chart above means: If forward returns align with the historical average, the S&P 500 will drop 4% by February 2027, it will drop 20% by February 2028, and it will drop 30% by February 2029.
Of course, historical trends are not a guarantee of future results. CAPE ratios are based on past data, meaning they do not consider the possibility that earnings could grow faster in the future as enterprises adopt artificial intelligence. In that scenario, the S&P 500 could continue climbing while its CAPE ratio falls to a more sensible level.
However, investors should take Buffett's warning seriously. Sell any stocks you would feel uncomfortable holding through a prolonged downturn and buy only stocks that meet these criteria: (1) Their valuations are reasonable, and (2) their earnings are likely to be materially higher five years from now.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, and The New York Times Co. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
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