Buffett Just Dumped His S&P 500 Holdings—What It Means for You

Investors who study history will likely be better off than those who don’t since they’ll be able to spot other people’s mistakes and not repeat them for their own journey. With this in mind, studying one of the market’s greatest minds when it comes to investing can be a great benefit in avoiding some of the pitfalls that come with exposure to the financial markets.

That mind is the very Oracle of Omaha, Warren Buffett. The man who holds one of the best track records expanding over several decades has now decided to completely shift his portfolio in ways he hasn’t done since the dot com bubble of 2000, or the months before the great financial crisis of 2008 ensued to bring markets into a historical decline that most have forgotten about in today’s euphoric all-time highs for the S&P 500 index.

However, Buffett knows something that most have been ignoring, and this factor has now extended to such a level that he saw no other choice but to sell all of his Vanguard S&P 500 ETF VOO, and even cut a significant chunk of his holdings in other areas, such as the financial sector through Bank of America Co. BAC, or the technology sector via Apple Inc. AAPL. The question is: What caused him to lose confidence in the market?

Buffett History Repeats Itself

Those who study Buffet will agree that the investor is a creature of habit, not fond of operating outside of what he calls his “Circle of competence.” That means that if he doesn’t understand what’s under the hood of an investment, he is quite alright with missing out on one heck of a party, of course, that’s brought on some critics lately.

By choosing not to participate in the artificial intelligence and cryptocurrency mania that has driven today’s markets to all-time highs, Buffett's critics have credited this decision to him being out of touch and simply not understanding the potential opportunities in the market. The thing is, this is precisely what was said about him back in 1999.

When Buffett chose to go into cash (at similar percentage levels as he is today), he was critiqued for not understanding internet companies and missing out on what was a big old party back then. But everyone knows what happened next. A rotation from growth stocks back into value took place, reclaiming Buffett’s place as the cool and collected mind of the market.

Today, the story is not so different. The exuberance, the excess returns in names like NVIDIA Co. NVDA, the creative accounting schemes in companies loading Bitcoin into their balance sheets like MicroStrategy Inc. MSTR, and the very same critics saying Buffett has lost his touch by sitting on 25% cash in Berkshire Hathaway Inc. BRK assets.

Flashing Lights Lead the Selling

That being said, here is a checklist investors can follow in order to get behind what Buffett might be considering today. First, as he quoted in his 1999 CNN Money interview, the level of corporate earnings as a share of the United States GDP is concerning.

The typical level of corporate earnings is between 4% and 5% of GDP, and Buffett has gone into cash as soon as this hits 6% to 8%. Today, investors are at the highest level with an extended 14%. This matters because it would have to call for GDP growth of over 5% at today’s bond yields of 4.5% and inflation rates of 2.5%.

5% GDP growth is not likely, not even with the most bullish economic outlooks. This means the market has to deleverage big time, and Buffett is in no mood to time the top. Second, which might be more familiar to investors, is the “Buffett indicator,” measuring the stock market’s value ratio to the United States GDP.

Consequently, this ratio is at its highest ever. In other words, investors are facing the most expensive S&P 500 index ever. But does that mean selling everything as Buffett did? Not really.

For most investors who manage their own money, especially those who have been dollar-cost averaging into indexes for years, a market hiccup would probably cause some short-term worries, only to then be perceived as a buying opportunity. On the other hand, Buffett is responsible for other people’s money, so he must act more aggressively on these findings.

More than that, some areas, like the energy sector and consumer staples, still carry some upside even in a potential market decline. Volatility could trigger a rotation into these areas if Buffett’s caution turns out to have substance behind it, which is why he also bought over 29% of Occidental Petroleum Co. OXY despite his selling in other areas.

It could also be the exact reason why other institutional investors have found these three stocks, Advanced Micro Devices Inc. NASDAQ: AMD,  Celsius Holdings Inc. NASDAQ: CELH,  and Alibaba Group NYSE: BABA to be undervalued gems today, justifying recent buys that investors can consider for their own portfolios ahead of a potential decline. If history teaches anything, it is that when markets critique Buffett, something big is usually coming.

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