Warren Buffett Breaks 6-Year Streak, Doesn't Buy Back Berkshire Shares Despite $320B Cash Pile

Billionaire investor Warren Buffett is known for mastering the strategy of identifying and buying great businesses at lower prices. He has abided by this rule to date, with no exceptions. For the first time in six years, Buffett decided not to buy back shares of his own company, Berkshire Hathaway, in Q3 despite having over $320 billion in cash, according to the company's latest filing with the Securities and Exchange Commission. Berkshire Hathaway was a net seller of stocks in Q3 as the Oracle of Omaha offloaded millions of Apple and Bank of America shares alongside most of his Ulta Beauty holdings.

Buffett's Move Is A Signal To Investors That Berkshire Hathaway Could Be Overvalued

CFRA Research analyst Cathy Seifert recently told CNN that Berkshire Hathaway's decision not to buy back shares could mean the stock is overvalued. "That Berkshire Hathaway did not repurchase any shares would lead most people to say, 'Well, if they're not buying back their stock, why should I?'" Seifert added. The company stated in its regulatory filings that Buffett will buy back shares when he feels the stock price is "below Berkshire's intrinsic value, conservatively determined."

Berkshire Hathaway's Class A stock was trading at around 1.6 times its book value in the first week of November. Book value is a company's implied net value after all company assets are liquidated and debts are paid off. While Berkshire Hathaway had mentioned earlier that it wouldn't buy back company shares if it traded over 1.2 times its book value, the Buffett-run company scrapped that policy in 2018. Berkshire Hathaway Class A shares have gained over 30% year-to-date to close at $708,000 on November 18 to outpace the S&P 500's 24.26% jump in the same duration.

What Does Buffett's Record Cash Pile Say About The Overall Market?

Berkshire Hathaway has amassed cash in the past nine consecutive quarters. The company's cash pile had swelled to $320.3 billion in Q3 from over $271 billion in Q2. However, most of the cash or $288 billion, is invested in short-term Treasury bills. NYU Stern School of Business's finance professor Aswath Damodaran explained that Berkshire Hathaway's call to avoid buying back its own shares last quarter could mean that company management is cautious about the current market situation, possibly because they think the market is "richly priced."

Meanwhile, AJ Bell analyst Russ Mould highlighted in a recent note that Berkshire avoiding share buybacks as they continue to pile on cash could mean the billionaire investor is worried about the overall economy. "All this suggests that Buffett has serious concerns about the economic backdrop and the current state of the stock market," Mould wrote. "It implies a risk-off mentality and the hallmarks of an investor who is prepared to sit and wait for a better entry point."

'Buffett Indicator' Hovering Close To Record Levels

The "Buffett" Indicator increased to 198.1% last week, implying that US stocks could be highly overvalued. The indicator, devised by Buffett, is simply the ratio of the total US stock market capitalisation to the latest quarterly US GDP estimate. The US stock market value reached an all-time high last week, reaching $58.13 trillion, almost double the US GDP last quarter.

"For me, the message of that chart is this: If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire," Buffett had previously said. The time-tested stock market valuation indicator was deemed in a 2001 Fortune report among the best valuation tools at any given moment. Currently, Buffett doesn't see much room for growth in the market and could hold onto that massive cash pile until the market corrects or any alternative value stocks emerge.

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