I always thought that Warren Buffett never predicts Market crashes Warren Buffett today has more cash as a percent than he had before the 2007 financial crisis I was always taught that Buffett likes to hold stocks and never sell them Warren Buffett has now sold 2/3 of his Apple shares which is his largest stock position and sold 266 million shares of his second largest position he has done more selling than buying over the past 2 years selling stocks and hoarding cash either buffer is losing it in his old AG or he knows something that we don't
we've got a bunch of things to look at in order to see why he's doing what he's doing is he preparing for a crash the first ingredient that we need to look at is the prices of stocks if prices are high compared to the average then they're more likely to revert downwards one of the best ratios that we have to measure this is the SNP 500 PE ratio S&P 500 is just 500 of the largest and most well-known stocks in the market and the PE Ratio is comparing prices to earnings the price you pay to
how much you get and return if we look at the current S&P 500p ratio it is 30.6 so prices are 30 times higher than the earnings of the stocks what does that imply well the average throughout history is 16 for this ratio this means right now prices are almost double what they have been throughout history one thing is clear we're in an expensive Market but there's more things that we need to look at Warren Buffett famously said that this indicator is probably the best single measure of where valuations stand at any given moment the buffer
indicator compares the total US Stock Market Value to the gross domestic product of the country anything below 84% is considered significantly undervalued between 84 to 108% is moderately undervalued 108 to 132% is fair valued 132 to 156 is modestly overvalued and anything above 156% is significantly overvalued and right now this indicator is 2011% meaning at today's prices the market is not fairly valued not modestly overvalued but significantly overvalued in 2007 before the great financial crisis this indicator was only half of this at 105% and even before the 2000. bubble the indicator was lower at 138%
it starts to leave a clue why buffer is doing what he's doing since 1981 the stock market has essentially been on a oneway ticket up yeah we've had a few blips on the way but the S&P 500 has gone from 346 points to 6,000 points it does make you wonder why and then you take a look at us interest rates since 1981 the interest rates have essentially been on a one-way ticket down from 19% to 0% rates if we ignore the little increase we've had recently this might remind you of a famous Warren Buffett teaching
everything in valuation gets back to interest rates interest rates covering everything you've looked at interest rates and said interest rates are gravity on stock prices he said interest rates are to asset prices what gravity is to the Apple when there are low interest rates there is a very low gravitational pull on asset prices and this is kind of what we've seen over the past 40 years lowering interest rates have allowed asset prices to increase because there's no gravitational pull on them so they've just kept going up and up and up the question becomes well what
happens to stock prices when interest rates rise this is relevant because well we've seen this rise in interest rates recently if they continue to stay at similar amounts and don't drop too much we might see a gravitational pull on stock prices and that is another risk that's in the market right now and a lot of it depends on what this man Jerome pal decides to do one of the most important recession risks is what I call the dreaded yield curve the yield curve is historically one of the greatest predictors of a recession and of course
a recession is quite well correlated with a market crash as you can see the yield curve has accurately predicted the last four recessions and actually even if you go back further it's forecasted every recession since 1969 so it's a relatively reliable indicator but what's it doing now right now we have been in a pretty deep inversion it went all the way down to minus 1.88 which is much more deep than it was in 07 20089 you actually have to rewind all the way back to the energy crisis in 1980 to get a feel for a
similar type of inversion this large as you can see we seem to be on the way out of the inversion and what tends to occur when this happens well a recession comes historically the time between the first month of an inversion and the starter of a recession has ranged from 6 to 18 months as per S&P Global unemployment is quite a cyclical matter it tends to gradually decrease over time and then have a sharp increase decrease over time and then a sharp increase right now we've basically been on that gradual decline except we have seen
a bit of an increase as of late which interpret that how you want S&P Global use nine leading indicators when trying to figure out if a recession may be on the horizon as of the latest report we have had four of those nine signaling red AKA and negative growth level those four are terms spread con consumer sentiments manufacturing new orders and Bank Landing practices SNP 500 Global wrote notably consumer sentiment moved back to negative after remaining positive since December last year as consumers were wary about the 12 months ahead of business conditions as interest rates
continue to remain higher for longer with these unique Mark conditions that begs the question what should we do should we just short stocks being short something where your loss is unlimited quite different than being long something you might think it's easier to make money on Short Selling and all I can say is uh it hasn't been for me I don't think it's been for Charly okay so probably don't short but here are some things that over the years Buffett has recommended to do his general advice is don't wait for a crash before investing I remember
back in 2018 a lot of people were saying that the stock market is overvalued prices are at all time highs we haven't seen a crash for a long time be careful about where you invest and guess what happened to stocks in the year is following that that's why generally you want to be very careful about playing the waiting game because you can miss out on a lot of returns this company in 1890 or thereabouts the whole company sold for $2,000 got a market value now of about 50 odd billion somebody could have said to the
fell was buying this in 1890 you know you're going to have a couple of great world wars and you know you'll have you'll have the Panic of 1907 how all these things will happen wouldn't it be a better idea to wait we can't for that mistake the other thing that he teaches is generally you want to keep holding stocks no matter what's happening with the market it's not our natural inclination to sell and on the other hand we have held the Washington Post stock since 1973 I've never sold a share of Berkshire having bought the
first shares in 1962 we've held Coke stock since 1988 we've held gillet stock since 1989 holding stocks is very beneficial taxwise because you don't have to pay tax when you sell your stock if you never choose to sell your stock Warren Buffett's made billions millions of dollars from Coca-Cola stock and he's barely paid gains on that because he's predominantly only held the stock as Charlie manga says the big money is not in the buying and the selling but in the waiting one of his major teachings has been you want to own pieces of businesses over
time as opposed to cash cash is going to become worth less over time but good businesses are going to become worth more over time the one thing I will tell you is that the worst investment you can have is Cash everybody's talk about cash being King and all that sort of thing but cash is is normally not King because it produces nothing a stock AKA a business produces food or sells products or develops technology and makes profit from this cash yeah you can get a yield on it from the government or in the bank but
businesses over time have done much better we always keep enough cash around so I feel very comfortable and don't worry about sleeping at night but it's not because I like cash as an investment cash is a bad investment over time but you always want to have enough so that nobody else can determine your future and advice number four he will often say is just buying Index Fund the best single thing you could have done on March 11th 1942 when I bought my first dock was just buy an index fund and never look at a headline
never think about stocks anymore just like it would do if you bought a farm you just buy the farm let the tenant farmer run it for you and I pointed out that if you'd put $10,000 in an index fund that reinvested dividends and it would come to $51 million now you want to know what's interesting right now Buffett is not doing any of these instead of listening to what Buffett says I want to dig into what he's doing because that's sometimes more important the first thing that he's doing is Warren Buffett on behalf of Brookshire
halfway has been selling some stock a lot of stock he is selling this stock which has been his largest position since 2017 I never expected him to sell Apple I thought he'd just hold the stock for life which he' done for a bunch of other major positions but in the fourth quarter of 2023 he shocks us all he sells 10,000 shares of Apple in the next quarter he sells 100,000 and then 400,000 we have sold shares in total he's now reduced his Apple position by 2/3 of the original amount why did he do this the
answer is actually obvious he literally spelled it out to us in his latest birkshire meeting we are paying a 21% federal rate on the gains were taking in apple and that rate was 35% not that long ago and it's been 52% in the past they can change that percentage any year and the percentage that they've decreased currently is 21% and I would say with the present fiscal policies I think that something has to give and I think that higher taxes are quite likely he's taking money off the table while he has the chance to pay
lower taxes smart move can't blame him what else is he doing Warren Buffett has been selling not only his largest stock position but his second largest too in the last few weeks Warren Buffett's birkshire hathway has been dumping billions of dollars worth of Bank of America stock in total he's sold about $10.5 billion worth of the stock amounting to 26% of Berkshire stake in the company after being a shareholder in banks for how many decades he's now sold a huge slice of his largest bank stock and the rest of his bank stocks do you remember
what he did with them some of the banks that you've sold include USB Wells Fargo Goldman Sachs JP Morgan PNC I did sell banks that we'd own for 25 or 30 years so that is a lot of selling fully selling all of your bank stocks apart from one even that one you sold a big portion of and then you sold most of your larger stock position and then on top of this you've done more selling than you have done buying the last few years this is very unbuffed likee so what does this leave him with
have a guess R Buffett birkshire haway now holds over $325 billion in cash after selling off billions in apple and Bank of America they've now got more cash than ever $325 billion in cash that's more cash than the entire GDP of New Zealand Portugal or Chile but interestingly it's not actually important how much cash Buffett has at birkshire 100 billion 200 billion 300 billion what does that mean it's all just big numbers what's important is how much cash he owns as a percentage of his overall portfolio right now he holds 50% cash compared to the
amounts he has in public US Stock equities the only time we saw something similar to this was a few years before the great financial crisis in fact he didn't even hold this much cash before the dotom bubble in 2000 but just remember that this is compared to his us equities if you compare it to his total portfolio the cash position is more like 25% 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 equity markets we find it quite attractive so we've
got Buffett saying all of the usual things but at least as of right now he's doing the opposite so there's a crash coming well I personally have a view similar to buffer and that view is a view of agnosticism we Haven the faintest idea what the stock Mark is going to do when it opens on Monday we never have had to predict what's going to happen next month or next year I truly don't think anyone knows but what we can say is that stock prices are fairly baked in right now and there's also a few
risk factors that are in there too and who knows maybe the right option right now is to play the game similar to Buffett play it safe and to take some cards off the table
