Warren Buffett Sold 2 S&P 500 Index Funds Mere Months Before the Correction, but He Doesn't Have a Crystal Ball

Had you invested $1,000 in the Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) holding company when Warren Buffett took the helm as CEO in 1965, you would have been sitting on a whopping $44.7 million at the end of 2024. The same investment in the S&P 500 (SNPINDEX: ^GSPC) index would have grown to just $342,906 over the same period.

Berkshire currently holds $277 billion worth of publicly traded stocks and securities, but that portfolio is much smaller than it was at this time last year, following a selling spree by Buffett and his team. They even sold the conglomerate's only two S&P 500 index funds -- the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust -- during the final three months of 2024.

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Berkshire only owned $46 million worth of those index funds in total. Nevertheless, it sold them just months before the S&P 500 entered correction territory last week. But Buffett doesn't have a crystal ball; he's simply following his time-tested strategy which has worked so well for Berkshire over the last 59 years, so here's why investors shouldn't panic over his recent moves.

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The S&P 500 is expensive, even after the recent correction

Warren Buffett is a value investor who aims to buy great stocks at a fair price (though the cheaper the better), with the intention of holding on to them for decades. He likes companies with steady growth, robust profits, and strong management teams. He's especially fond of those with shareholder-friendly initiatives like dividend schemes and stock buyback programs, because they help to compound his returns more quickly.

The price-to-earnings (P/E) ratio is one of the most popular valuation metrics on Wall Street. It's calculated by dividing the share price of a company (or an index of companies) by its earnings per share. The S&P 500 has traded at an average P/E ratio of 18.1 since the 1950s -- however, it soared above 29 toward the end of last year, making the index historically expensive.

Even after the recent correction (which exceeded 10% at the low point last week) the S&P still trades at an elevated P/E ratio of 26.7, which could leave the door open to further weakness this year.

Knowing when to buy stocks is only one half of the equation when it comes to being a good value investor. Experts like Buffett also know to take some money off the table when the market gets ahead of itself, to stockpile a little dry powder which can be redeployed at cheaper prices.

Buffett went on a selling spree during 2024

Berkshire spent approximately $38 billion acquiring shares of Apple (NASDAQ: AAPL) between 2016 and 2023, which remains the highest amount it has ever invested in a single company. That position was worth over $170 billion heading into 2024, and it made up around 50% of the conglomerate's entire portfolio by value.

Still, it was a surprise when Buffett and his team gradually sold more than half of the position throughout last year. Berkshire still holds around $63 billion worth of Apple stock as of this writing, but it now represents just 23% of its total portfolio.

But Apple is just one of many stocks Berkshire trimmed -- or sold completely -- during 2024. It reduced its positions in Bank of America, Chevron, T-Mobile, Louisiana Pacific, and Charter Communications, to name just a few. It also exited its entire positions in Snowflake, Floor and Decor Holdings, Paramount Holdings, HP Inc, and Ulta Beauty.

Those names represent a cross-section of the U.S. economy, which emphasizes the idea that Buffett isn't bearish on any particular sector, but is concerned about the market as a whole.

Berkshire is now sitting on a record $334 billion in cash. That's right -- the value of its cash holdings is currently higher than the total value of its entire portfolio of publicly traded stocks and securities ($277 billion). While that further highlights Buffett's cautiousness on the market overall, history suggests he's likely to put large chunks of that money to work in new opportunities when he feels valuations are more reasonable.

Don't panic, because Buffett recently bought stocks, too

Buffett is one of the greatest investors to ever live, so his recent selling spree might trigger some anxiety for investors. However, he has been a buyer of stocks through all market conditions in the past, and this period is no exception because he managed to find some value toward the end of last year.

During the final two quarters of 2024, Buffett opened new positions in Domino's Pizza, Pool Corporation, and Constellation Brands. All three of those additions suggest he is bullish on consumer spending going forward, and if he's right, that spells great news for corporate earnings, both of which should support an eventual recovery in the market overall.

Besides, history suggests the S&P 500 always rises to new highs over time, so investors who treated dips as buying opportunities in the past have fared much better than investors who panic-sold on the way down. Even though the index remains somewhat expensive right now, that might not be the case if companies continue to grow their earnings in the coming quarters, which estimates suggest is likely.

Moreover, the current level in the S&P 500 will almost certainly look like a bargain when investors look back on this moment five years from now.

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Bank of America is an advertising partner of Motley Fool Money. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, HP, Snowflake, Ulta Beauty, and Vanguard S&P 500 ETF. The Motley Fool recommends Constellation Brands and T-Mobile US. The Motley Fool has a disclosure policy.