A closely watched value investor and longtime watcher of the chairman of Berkshire Hathaway says that although Warren Buffett did not give away anything in his annual letter to investors on Saturday, he seems to be waiting for a significant stock market decline before using his enormous and expanding cash hoard.
Bill Smead, founder and chairman of Smead Capital Management, told MarketWatch on Monday that Buffett wrote a letter in which he stated that he sees “nothing compelling” in terms of buying opportunities, that Berkshire continues to add to its cash hoard, and that Buffett is ready for “wild swings” in stock values. Buffett did not provide much helpful guidance in the letter.
“Read between the lines…and he’s not going to be interested in buying until we have a wild swing to the downside,” Smead, who has spent forty years closely monitoring Buffett and Berkshire Hathaway (BRK.A) (BRK.B), stated.
Furthermore, by “wild swing,” Smead does not indicate a simple adjustment. According to him, Buffett is preparing for a bear market comparable to the dips that followed the dot-com bubble burst in 2000, when the S&P 500 SPX dropped 49.1% from its peak to its trough, or the bear markets of 2007–2009 or the late 1960s and early 1970s.
Buffett said in his letter that analysts have focused a lot of attention on Berkshire’s increasing cash and cash-equivalents holdings, which as of the end of fiscal 2024 had risen to almost $300 billion. Buffett maintained that Berkshire would always rather own companies—either fully or partially—than cash or purchase stock in outstanding enterprises.
“The vast majority of your money is still in stocks, even if some analysts currently consider Berkshire to have an exceptional cash position. Buffett wrote, “That preference won’t change.” (Go here to read the letter.)
Meanwhile, in 2024, Berkshire sold $134 billion worth of stock. Additionally, Buffett has repeatedly bemoaned the challenge of locating appealing prospects.
Opinion: Warren Buffett reduces his stake to U.S. stocks after warning of “scoundrels” and “fiscal folly.”
Smead has said that investors have to get ready for a “Noah stock market.” That is to say, there will be a prolonged and intense downpour. He made the case in a recent note that investors ought to construct a portfolio of common stocks “which will float when the multiyear bear market creates a waterfall of selling among the magnificent growth stocks and passive S&P 500 owners.”
According to Smead, inflation poses the greatest threat. Following Donald Trump’s election victory, investors roared equities to yet another round of all-time highs, drawing comparisons to Ronald Reagan’s 1980 victory and the subsequent beginning of a multiyear bull market. The problem, according to Smead, is that after Reagan’s election, the raging inflation was quickly put down, but now it seems like inflationary pressures are increasing.
“We’re counting on inflation to keep rising. In his recent email, Smead claimed, “Ask the Boeing machinists or the dockworkers what a long-term union contract that raises your income 8.5% per year compounded means.”
Buffett cautioned in his letter against “fiscal folly,” which has the potential to devalue paper money. “This careless behavior has become commonplace in certain nations, and the United States has nearly reached the brink in the little history of our nation. According to Buffett, fixed-coupon bonds offer little defense against a currency run.
Smead stated that he did not interpret that as a clear inflation warning. “What little he said [in the letter] that was to the point was so subtle, you would have to be an expert in subtlety to find it,” he stated to MarketWatch.
Buffett’s message, in Smead’s words, was to “do as I do, not as I say.” Save money and avoid making rash purchases.
