As Warren Buffett Prepares to Step Down, His Warning to Wall Street Is Now at Ear-Shattering Levels

The next time Berkshire Hathaway (BRK.A +1.14%)(BRK.B +1.20%) reports earnings, Warren Buffett will not be the CEO. The Oracle of Omaha will step down from the position he’s held for over six decades at the end of the year, passing the baton to Berkshire veteran Greg Abel. Buffett will stay on as chairman of the board of directors.

As Buffett prepares to pass the torch, Berkshire’s actions, as shown in the company’s recently reported third-quarter earnings, continue to suggest that Buffett and his team remain cautious when it comes to the stock market. With just a few months left in his tenure, Buffett’s unspoken warning to investors is now at ear-shattering levels.

Berkshire wants nothing to do with the stock market

Berkshire reported its third-quarter results on Nov. 1. The large conglomerate is still staying on the sidelines as the market continues its upward climb, in part thanks to two interest rate cuts by the Federal Reserve. Berkshire, on the other hand, continued to pile into cash, growing its cash and short-term investments in U.S. Treasury bills to over $377.5 billion.

The company was also a net seller of stocks during the quarter — it purchased close to $6.4 billion of equities and sold about $12.5 billion. The company also announced a $9.7 billion deal last quarter to acquire Occidental Petroleum‘s petrochemical unit, which makes chemicals for water treatment, healthcare, and other commercial uses. That is Berkshire’s largest acquisition in about three years.

It’s important to understand that Berkshire’s sheer size makes it difficult for Buffett and his team to find attractive investments since few companies are large enough to move the needle. But the extended lack of buying activity also shows that Berkshire finds very little attractive in today’s market, which trades at elevated levels. Further supporting this idea is the fact Berkshire has not repurchased any of its own stock so far this year. That suggests management similarly finds Berkshire stock too expensive.

Meanwhile, there is the Buffett indicator, which was named after Buffett because he has said the metric is “probably the best single measure of where valuations stand at any given moment.”

The Buffett indicator looks at the total market cap of the Wilshire 5000, representing the U.S. stock market, and compares it to U.S. gross domestic product (GDP). Recently, the Buffett indicator surpassed 220%, an all-time high. Historically, Buffett considered the market to be overvalued if the Buffett indicator traded over 100%, although it hasn’t traded below this level since 2013.

Buffett’s investment philosophy

Investors should not take Berkshire’s lack of investment activity lightly. One of the reasons Berkshire stock has done so incredibly well for so many decades is because its leadership team has largely been able to sidestep huge market downturns. Buffett doesn’t pretend to be all-knowing, but he invests with a long-term approach throughout the economic cycle. Just because the market has remained remarkably strong this year doesn’t mean a downturn couldn’t be waiting on the horizon.

It’s also possible Berkshire is stockpiling cash to put Abel in a position of strength as he takes on the daunting task of filling the enormous shoes left by Buffett.

Despite Berkshire’s cautious stance in this market, investors shouldn’t necessarily follow Buffett to the sidelines. Remember, running one of the largest portfolios and conglomerates in the world is quite different from running one’s own retirement portfolio. Berkshire might be sounding the alarm bells, but long-term investors don’t have to panic.

However, concerned investors can certainly take actions to reduce their risk exposure. For example, they might choose to hold more cash, reduce the concentration in their holdings by purchasing an equal-weight S&P 500 fund, or seek out stability in high-quality dividend stocks.