Warren Buffett: A "Storm is Brewing" in the Stock Market (40% Stock Market Decline)

But I don't mind at all under current conditions. Building the cash position, I think when I look at the alternative of what's available in the equity markets and I look at the composition of what's going on in the world, we find it quite attractive.

Warren Buffett is prepping for a staggering $55 trillion storm that has been brewing in the stock market for the last 15 years. Buffett's favorite stock market indicator is flashing alarm bells, warning that a 40% decline in the stock market could happen any day now.

For background, Buffett is by far the most closely followed investor in the entire world. Every move he makes is scrutinized to the very smallest detail. However, it's not what Buffett is doing now that has people worried; it's actually the opposite. As weird as it may sound, it's what Buffett isn't doing that has people incredibly nervous.

Make sure to stick around till the end of this video to find out how you can protect yourself from what is ahead. Here’s what Buffett had to say at the recent Berkshire Hathaway annual shareholders meeting when asked why he had been selling stocks and piling up cash.

Take a listen: “Uh, this question is from Johan Halen who writes, you're sitting on $168 billion of cash, which you told us today is now more than $182 billion. His questions are, one: what is Buffett waiting for? And, two: why not at least deploy some of it?"

“Well, I think that's pretty easy to answer. I don't think anybody sitting at this table has any idea of how to use it effectively, and therefore we don't. We don't use it, and we don't use it now at 5.4%, but we wouldn't use it if it was at 1%. Don’t tell the Federal Reserve that.”

“But we prefer it. But we don't—we only swing at pitches we like. And if anybody tried to swing at every pitch or felt that because they hadn't swung at a pitch for the last two pitches, they ought to swing at the third one or something like that, it's just—it’s—there are times. And obviously, but I would say this: I would not like to be running $10 billion now.”

“$10 million, I think we could earn high returns on because I think there are just a few things that happen on a very, very small scale. But if we had $10 billion, I wouldn't basically see many more opportunities than we found now. It's true that something like Japan we could have done if the company had had a $30 or $40 billion and we'd have made great returns on equity. But if I saw one of those now, I'd do it for Berkshire.”

“You know, it isn’t like I’ve got a hunger strike or something like that going on. It’s just that things aren't attractive, and there are certain ways that can change, and we'll see whether they do.”

Warren Buffett is universally regarded as the greatest investor of all time. However, he has been eerily quiet as of late when it comes to buying stocks. In fact, Buffett has even been selling billions of dollars' worth of Apple stock, a company that just a couple of years ago was considered one of his "forever holdings."

As a result, Buffett's cash pile at Berkshire Hathaway has hit a staggering $189 billion, leaving many people to believe he is piling up cash to prepare for an upcoming stock market crash. “Apple and American Express and Coca-Cola… when Greg takes over this place—but I don't mind at all under current conditions building the cash position. I think when I look at the alternative of what's available in the equity markets and I look at the composition of what's going on in the world, we find it quite attractive,” he said.

He stated that he did this because he didn't mind building up the cash hoard at this point because of the environment that's taking place—the economic environment, the stock outlook. I mean, I tried to pull a little more out of him later with another question, and he didn't bite on it. But what are you going to do with all that cash? Why do you need all that cash?

He says he can't find good places to put it, and that makes you wonder if he thinks the entire market's overvalued. Buffett has repeatedly said in public venues that it is impossible to time the market; however, this may be an example of the old saying: do as I say, not as I do.

As we can see here, despite Buffett professing that he never tries to time the stock market, he does always seem to have a large amount of cash ready to buy stocks when the market crashes.

In gray, we have the Berkshire Hathaway cash pile by quarter from the years 1996 to 2018. The orange line represents the price of the S&P 500 during that time period. For reference, the S&P is an index consisting of 500 of the largest publicly traded companies listed in the United States. It is generally considered a proxy for the US stock market.

There are a couple of very important time periods to draw your attention to. The first is the Dot-com bubble in 1998 and 1999. As you can see here, the S&P 500 was up over 50% from the beginning of 1998 to its eventual peak just a couple of years later. During that time, Warren Buffett was avoiding investing in the stock market, as you can see, Berkshire's cash position climbed by a factor of 10 over just a couple of years.

During this time, there was a significant number of people claiming that Buffett was washed up. Critics said his style of investing didn't work anymore and that Buffett was foolish for not investing in the high-flying technology sector. This period culminated with Buffett's now infamous lecture at the exclusive Sun Valley Conference.

For background, Sun Valley is an invite-only annual conference for the most influential people in the media, technology, and finance industry. In the year 1999, the conference was filled with newly minted millionaires and billionaires as a result of the soaring stock market driven by young technology companies.

In an ironic twist, the keynote speaker that year at the conference was none other than Warren Buffett himself. Buffett had famously avoided investing in technology companies, instead making his wealth by investing in boring, so-called old economy businesses. As only Buffett can do, he proceeded to use his keynote speech to kindly explain to that year's attendees how the stock market was in a serious bubble.

In his wholesome and folksy way, Buffett told the crowd that while things may look great now, it was only a matter of time before the hypothetical music stopped playing. As I’m sure you can imagine, this did not make Buffett popular amongst the crowd. In fact, he was practically booed off stage.

I’m sure you know how this story ends. However, not too long after Buffett's speech, the Dot-com bubble burst. The S&P fell by over 50%, and the tech-heavy NASDAQ fell by a staggering 75%. In fact, it wasn't until the year 2015, 15 years later, when the NASDAQ returned to levels hit during the peak of the bubble. Many of the people that said Buffett was washed up saw their fortunes disappear in the crash.

Going back to the chart of Buffett's cash position, Buffett used the Dot-com bubble crash as a buying opportunity, spending down his cash position buying attractive investments for cheap prices.

There is a saying that history doesn’t repeat, but it sure does rhyme. You can see here that Buffett also built up a significant cash position during the run-up of the Great Financial Crisis. Buffett's cash pile grew to an all-time record at that time of over $40 billion, more than double the amount of cash Buffett had sitting on the sidelines during the Dot-com bubble.

As the stock market again sold off by over 50%, Buffett subsequently spent down his cash position buying up wonderful assets for low prices. This included buying the railroad BNSF for $34 billion. That business is likely worth at least $150 billion now, resulting in a $100 billion profit for Buffett and Berkshire.

Buffett also invested tens of billions into prominent blue-chip companies. These included the industrial conglomerate General Electric, chemical producer Dow Chemical, and the food company Mars, owner of popular brands such as the Three Musketeers, M&Ms, and Snickers. He also invested heavily into financial services companies, Goldman Sachs and Bank of America.

The Bank of America position is one Buffett continues to hold. As of the making of this video, Buffett's stake in Bank of America has now grown to a staggering nearly $40 billion.

As these two examples have shown, while Buffett claims that he doesn't try to time the market, whenever the market does crash, he very conveniently happens to be sitting on a large pile of cash. The cash pile that Buffett currently has makes the other two examples look tiny by comparison.

Buffett has nearly $200 billion in cash and cash equivalents—nearly five times the size of the amount of cash he had accumulated before the financial crisis. Given Buffett's track record of accumulating cash ahead of a major downturn, you can now understand why Buffett's actions are making people extremely nervous.

There can only be one reason Buffett has allowed cash to pile up at Berkshire: Buffett can't find any attractive investments because the stock market is overvalued. In the year 2024, of course, Buffett will never come out and say that directly. He knows how much influence he has, and he doesn't want to be responsible for people going out and selling all their investments because he said the market was overvalued.

However, let's rewind the clock to the year 2001, a year when Buffett was famous but nowhere near what he is currently. As a result, Buffett was more willing to speak his mind freely. Listen to what he had to say back then when asked why cash was starting to pile up at Berkshire:

“Well, there are times when we're a wash in cash, and there have been plenty of times when we didn't have enough cash. Charlie and I, I remember in the late 60s, we were—when bank credit was very difficult—we were looking for money over in the Middle East. You remember that, sh they do? Yeah, and they wanted us to repay it in dinars. Yeah and the guy that wanted us to repay him in dinars, or whatever the hell they called them, was also the guy that determined the value of those things.”

“At the—we were not terribly excited about payday and having him decide the exchange rate on that date. But we obviously are looking every day for ways to deploy cash. We would never have cash around just to have cash. I mean, we would never think that we should have a cash position of x%. And frankly, I think these asset allocation things that tacticians on Wall Street put out about 60% stocks and 30%, we think that's total nonsense.”

“So, we want to have all our money working in decent businesses, but sometimes we can't find them, or sometimes cash comes in unexpectedly, or sometimes we sell something, and we have more cash around than we would like. And more cash around than we would like means that we have 10 or 15 cents around because we want money employed. But we'll never employ it just to employ it.”

“And in recent years, we've tended to be cash-heavy, but not because we wanted cash per se. In the mid-70s, you know, we were scraping around for every dime we could find to buy things. We don’t like—we don’t like lots of leverage, and we never will. We'll never borrow lots of money at Berkshire. It's just not our style. But you will find us quite unhappy over time if cash just keeps building up, and I think one way or another we'll find ways to use it.”

As we just heard from Buffett, he doesn't like holding large amounts of cash. He would rather be investing that money and using it to generate strong returns. However, Buffett also refuses to buy stocks unless prices are attractive.

One way to measure whether the stock market is overvalued is to use the so-called Buffett indicator. The Buffett indicator was coined by, yep, you guessed it, Warren Buffett over 20 years ago. He has called it “probably the best single measure of where stock valuations stand at any given moment.”

Once you see what the Buffett indicator is telling us about the stock market, you will understand why Buffett isn't buying stocks. The calculation for the Buffett indicator is a very simple fraction. On the top is the total value of the US stock market, as measured by the Wilshire 5000 Index. This index seeks to capture 100% of the US stock market and includes all US-listed stocks with readily available prices.

As of March 31st of this year, the value of the stock market was $55.84 trillion. On the bottom of the fraction is the size of the US economy, as measured by gross domestic product or GDP for short. GDP is the value of all the goods and services produced within a country and is used as a proxy for the size of an economy.

The most recent GDP reading was $28.2 trillion. By dividing the value of the stock market ($55.84 trillion) by GDP ($28.2 trillion), we get a Buffett indicator of 197%.

But the important question is: how does that compare to historical levels? Maybe 10% higher? What about 20%? If the stock market is really overvalued, maybe 30% higher than normal? Well, try again. The current Buffett indicator is a staggering 61% higher than the historical trend line shown here—a full two standard deviations above what is considered fairly valued.

Put another way, this means that at the current size of the economy, the stock market would have to fall by a staggering 40% for it to be considered fairly valued. It now becomes awfully clear why Buffett has been selling stocks and building up cash.

But what are everyday individual investors supposed to do with this information? The answer to this can be found in Buffett's most recent annual letter to shareholders. In this letter, Buffett talked about how he manages his company, Berkshire Hathaway, to be a "financial fortress" capable of withstanding any financial shock that may come its way.

Here’s how he described it: “Your company,” referencing Berkshire, “also holds a cash and US treasury bill position far in excess of what conventional wisdom deems necessary. Extreme fiscal conservatism is a corporate pledge we make to those who joined us in ownership of Berkshire. Berkshire is built to last.”

The same advice can be applied to the financial situation of individuals: minimize costs, build up diversified earning streams, save up cash. These simple strategies can help protect you, regardless of what the future holds.

If you enjoyed this video, make sure to check out this video here because with over 5 million views, it has been getting a ton of attention. It covers the trillion-dollar storm Buffett is seeing form in the US real estate market. I’ll see you over there.