Warren Buffett Nearly Made His Biggest Investment Since 2022. Here's What's Holding Him Back.

Warren Buffett has overseen the investment portfolio at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) for 60 years. In that time, he's produced mind-boggling returns for shareholders.

Since Buffett took over the company in 1965, Berkshire shares have returned an average of 20% per year. Over the course of 60 years, that adds up to a whopping 6,135,058%. Even if you had waited until the end of the trading session when Berkshire announced Buffett's takeover and bought a single $18 share, it'd be worth over $750,000 as of this writing.

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That's why the investing world pays close attention to the moves Buffett and his team of investment managers make in Berkshire's portfolio. Unfortunately, the Oracle of Omaha has been selling much more than he's bought over the last two and a half years. The last big investment he made was in Alleghany Corp. in 2022, which Berkshire acquired for a value of $11.6 billion.

At the company's annual shareholder meeting earlier this month, Buffett said he and the team came pretty close to spending $10 billion recently, which would have been Berkshire's biggest acquisition since Alleghany. But one thing held him back and continues to hold him back from making any big investments right now.

Image source: The Motley Fool.

The only two things Buffett looks for in an investment

Buffett contends that investment decisions aren't as complicated as some experts might lead you to believe. In fact, he says a decisions can be downright easy as long as there are two things in place.

"We'd spend $100 billion," Buffett told the audience after revealing Berkshire came close to a $10 billion deal. "Those decisions are not tough to make when something is offered that makes sense to us and that we understand and offers good value."

If the business is understandable and offered at good value, Buffett will buy it. Perhaps in more recent years, there should be a caveat that Buffett probably isn't looking at deals unless they're in the $10 billion range or bigger. Buffett later commented, "$10 billion wouldn't have done that much," referencing Berkshire's approximately $630 billion in liquid assets between its cash and equity portfolio.

But Buffett's simple investing philosophy has led to unparalleled long-term success, and it's not like the 94-year-old has completely lost touch with how businesses work. The explanation for why it's been so tough for Buffett to invest a lot of money recently is that there's not a lot of value in the market, especially among bigger companies.

A very opportunistic business

To run a business like Buffett runs Berkshire Hathaway requires being very opportunistic. Buffett and his team have to spot an opportunity and be prepared to take advantage of it when it arises. A good opportunity rarely lasts very long.

"Occasionally, very occasionally, I don't know when it will happen, it could be next week, it could be five years off, but it won't be 50 years off, we will be bombarded with offerings that we'll be glad we have the cash for," Buffett said at the meeting.

All this is to say that if you want to outperform a benchmark index like the S&P 500, you have to wait for the right opportunities. That said, Buffett says there's nothing wrong if an investor wants to buy an index fund and keep all of their money passively invested. In fact, that's what he's instructed the executor of his estate to do.

But for investors looking for an opportunity to buy individual stocks, the opportunities are few and far between. The S&P 500 trades for a very high valuation relative to its historic average. Its forward P/E ratio of 20.4 sits well above the mid-teen level investors are used to seeing. The CAPE ratio, which looks at the last 10 years of inflation-adjusted earnings, has climbed above 35, while it typically sits around 20.

But average investors have a big advantage over Buffett -- they can go small. Smaller companies aren't nearly as expensive as the biggest stocks in the market right now. Buffett would agree, as the purchases he has made over the last two and a half years have all been near the bottom end of any company Berkshire could consider to move the needle. The small-cap S&P 600 and mid-cap S&P 400 both trade closer to the 15 times forward P/E investors are used to, so it's worth looking for opportunities among these sectors.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.