Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
Berkshire Hathaway, led by legendary investor Warren Buffett, maintained a notably cautious stance on the stock market during the third quarter, marking the twelfth consecutive quarter of net equity selling. The conglomerate also refrained from repurchasing its own shares for the fifth straight quarter, contributing to a record cash pile of $381.6 billion. This approach comes even as the company reported robust third-quarter operating results.
Investment Strategy
During the third quarter, Berkshire Hathaway purchased $6.4 billion worth of stock while selling $12.5 billion in equities, continuing its trend of shedding more holdings than it acquires. This includes aggressive trimming of some long-held top positions, such as Apple.
The absence of share repurchases is also significant, particularly as Berkshire Hathaway’s stock experienced a meaningful dip from its August highs. Historically, Buffett had a specific price-to-book value threshold for buybacks, which he later abandoned, believing it did not always reflect the company’s intrinsic value. The stock currently trades around 1.5 times book value, down from 1.8 times earlier in the year.
Despite the cautious equity strategy, Berkshire Hathaway did make a notable acquisition last month, purchasing Occidental Petroleum’s petrochemical unit, OxyChem, for $9.7 billion in cash.
Third-Quarter Financial Performance
Berkshire Hathaway’s wholly-owned operating businesses delivered strong results, with after-tax operating profit climbing 34% to $13.5 billion in the third quarter.
The company’s underwriting earnings saw a significant increase, soaring from $750 million to $2.4 billion, attributed to fewer claims during the period. Berkshire’s Burlington Northern Santa Fe railroad division reported a nearly 5% rise in earnings to $1.45 billion, while its manufacturing and retail businesses saw an 8% increase to $3.62 billion. However, its utility portfolio experienced a nearly 9% decline in profit, settling at $1.49 billion.
Looking Ahead
The continued reluctance to invest in equities or repurchase its own stock, alongside the substantial cash reserves, suggests that Warren Buffett views the current market as overvalued. As Buffett prepares to hand off his investing duties to Greg Abel next year, the considerable cash position provides Abel with substantial capital for future investments, particularly in the event of a market downturn.
While Buffett’s cautious approach signals a belief that the market may be overheated, Geoffrey Seiler, the author of the report, advises individual investors against attempting to time the market. Instead, Seiler suggests implementing a dollar-cost averaging strategy, investing a set amount each month regardless of market fluctuations, often through exchange-traded funds (ETFs).
