Warren Buffett is fearful while others are greedy. Is it a warning?

The signals become difficult to ignore.

It seems very clear that Berkshire Hathaway (BRK.A 0.07%) (BRK.B -0.01%) CEO Warren Buffett is turning bearish on the stock market. It looks like Berkshire will end its second straight year as a net seller of stocks, and it has never dumped so many shares in its history.

Through the first three quarters of 2024, Berkshire sold $133.2 billion worth of stock, the majority of which Apple (AAPL 1.02%). And Buffett’s conglomerate has bought just $5.8 billion worth of stock so far this year. That reflects a similar pattern to 2023, when Berkshire sold $32.8 billion worth of stock and bought just $9.1 billion.

Not only is Buffett emptying Berkshire’s stock coffers, he’s also getting a potentially even more bearish signal about the market. For the first time in six years, Berkshire has not repurchased any shares, a sign that Buffett thinks Berkshire’s stock is overvalued at its current price.

The company — which includes insurance companies, the BNSF Railroad, utilities, restaurants, consumer products companies, energy companies and manufacturers, as well as its diversified stock portfolio — has a market cap hovering around $1 trillion, and it’s something of a microcosm of the stock market yourself. So Buffett’s reluctance to buy back company stock seems to reflect his thoughts about the broader market.

Widely regarded as one of the greatest investors of all time, Buffett is known for saying, “Be fearful when others are greedy, and greedy when others are fearful.” At this moment he clearly seems to have an anxious attitude. Historically high valuations, especially in the CAPE ratioindicate that the broad market is greedy.

So is Buffett’s behavior a signal that other investors should follow his lead? Let’s dig a little deeper to find out.

Why Buffett is Selling

A large part of Berkshire’s stock sales comes from its large stake in Apple, which has been Berkshire’s largest holding for years. And Buffett has sung the company’s praises on multiple occasions.

Over the past four quarters, Berkshire has sold 615.6 million shares of Apple stock, generating approximately $125 billion in proceeds.

In interviews, Buffett continued to praise Apple’s business but indicated that taking profits was a wise move as he believes the government will soon raise capital gains taxes.

Some politicians in Washington have discussed such a move, but no legislation has yet been passed, and such a move now seems unlikely as President-elect Donald Trump has advocated cutting corporate taxes. And Trump has the support of much of Wall Street and the business community, who are reluctant to see capital gains rise.

Buffett has given other indications that he believes the market is overvalued, saying in his shareholder letter earlier this year that there are no more attractive acquisition opportunities for his company. But it’s an oversimplification to say that Berkshire’s selling is solely the result of Buffett’s belief that the market is overvalued.

Buffett is great, but he’s not perfect

It’s worth remembering that Buffett, like all investors, makes mistakes, and even he hasn’t always followed his aphorism that he’s afraid when others are greedy.

For example, in 2007, when the stock market was peaking ahead of the Great Financial Crisis, the worst crash of Buffett’s career, Berkshire eagerly bought stocks rather than dumping them to avoid a crippling recession. That year, Berkshire bought $19.1 billion worth of stock and sold only $8.1 billion.

More recently, Berkshire’s track record as a net buyer and seller of stocks has been mixed, so it doesn’t seem like the best indicator of Buffett’s thinking, at least not on its own.

In 2020, the year of the pandemic-induced crash, Berkshire was a net seller of stocks, a sign of its failure to capitalize on the market’s March plunge.

Buffett has also said that it is impossible to time the market. That’s why he doesn’t expect to sell before a crash and buy at the bottom, despite his comments about fear and greed.

What it means for you

As an individual investor, it’s easy to look for signals in Buffett’s behavior, and sometimes they’re right. For example, there are other signs that the stock market may be overvalued, and his belief that taxes will eventually go up could be validated, as the budget deficit and national debt are problems that may require tax increases to correct.

However, it’s also worth remembering that the stock market tends to rise over time, and long-term investors may even be rewarded for buying just before a crash. For example the S&P500 is up almost 300% since its peak in 2007, and has almost doubled since its peak before the coronavirus crash.

Paying attention to Warren Buffett’s moves isn’t a bad idea, but you should also remember that net buyers have historically been rewarded by the stock market – even in the worst of times – if they hold on long enough.