Every time the stock market makes new record highs, value investors usually find fewer bargains and start to worry about the overvaluation of the market. We have had a lot of discussions about this. In principle, you can always find bargains in any market, but if as whole the stock market is overvalued, you might just be finding stocks that are relatively undervalued instead of significantly undervalued.
GuruFocus hosts two overall market valuation pages. One is based on Buffett Indicator and the other is based on Shiller P/E.
According to Buffett Indicator, as of today, the Total Market Index is at $ 50451.3 billion, which is about 180.5% of the last reported GDP. This indicates that the market is Significantly Overvalued. The US stock market is positioned for an average annualized return of 0.9%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.33%.
According to Shiller P/E, as of today, the current Shiller P/E is 32.6, which is 23.4% higher than the recent 20-year average of 26.4. This implies a future annual return of 3.6% if the Shiller P/E would reverse to its historical mean, and an Excess CAPE Yield (ECY) of 1.64%, which is the inverse of Shiller P/E.
One question we were asked by users is whether we can use Gurus’ asset allocations as an indicator for the bullishness or bearishness of the Gurus. That is a good question. The first Guru we want to check is, of course, Warren Buffett.
We will use the asset allocations of Berkshire Hathaway (BRK.A)(BRK.B) as the indicator. We want to see whether Berkshire Hathaway’s asset allocations can reflect Warren Buffett’s thoughts about the market valuations. Is he bullish or bearish on the stock market? Are bonds a better investment to him? The data we have comes from annual and interim reports of Berkshire Hathaway. It is the quarterly data that ends on 3/31, 6/30, 9/30 and 12/31 each year. Our research is developed into four parts.
1. Percentage of Cash, Bonds and Stocks
Can we use the percentages of stocks, bonds and cash as an indication on the preferences of Warren Buffett’s asset allocations?
The Assets Allocations (%) chart shows the percentage of cash and cash equivalents, fixed maturity securities and equity securities in Berkshire Hathaway’s assets since 12/31/1995.
We point out that the relative percentages can be significantly affected by the prices of stocks and bonds. For instance, in the market crash of 2008, Berkshire’s stock holdings were down about 50%, which dramatically reduced the percentages of stocks. But in general, we can still see the preference of Warren Buffett at different periods.
Currently Berkshire has about 65% of its liquid asset in Equity Securities (Stocks), 30% in Cash and Cash Equivalents (Cash), and 4% in Fixed Maturity Securities (Bonds).
Clearly Buffett is bearish on bonds. Is he bullish on stocks? Probably yes.
2. Cash and Cash Equivalents (Cash) to Total Shareholders’ Equity
We want to see if there is a clear pattern that Warren Buffett increased his cash and cash equivalents position during the financial crisis so as to minimize the potential dramatic loss resulting from equity securities. Here GuruFocus uses cash and cash equivalents divided by total shareholders’ equity as the indicator.
From Cash to Shareholder's Equity (%) chart, we can see that Warren Buffett reduced Berkshire’s cash positions dramatically in 1999 to 2000, when the tech bubble burst and he was finding bargains. He then steadily increased cash positions starting in 2000. In 2005 through 2006, he was saying that he had an elephant gun, but couldn’t find an elephant. The highest figure is 50.96% at the end of the first quarter of 2005. The cash position goes up and down around 20% of its liquid assets after 2008 financial crisis until the middle of 2016.
The cash position keeps going up since 2016 and reaches its 10-year high as 35.96% by the end of March 2020, when the Covid-19 hits the market. The largest transactions made by Buffett during the post-pandemic era occur on two oil companies, Occidental Petroleum Corp and Chevron Corp, leading the cash position back to 20% of its total shareholder’s equity. See more on Warren Buffett’s latest stock picks.
For the recent quarter, Berkshire's cash relative to equity ratio is about 28.77%.
3. Fixed Maturity Securities (Bonds) to Total Shareholders’ Equity
From Assets Allocations (%) chart and Bonds to Shareholder's Equity (%) chart, we can see during 6/30/1999 to 12/31/2002, Warren Buffett was very bullish on bonds as bonds were at 60% of Berkshire’s total equity. Then his bonds position started to decline to below 10% with more stocks bought.
For the recent quarter, Berkshire's bonds relative to its equity ratio was about 4.19%. We can tell from his fixed maturity securities position, as demonstrated in the above charts, that Warren Buffett is likely to be bearish on bonds now.
4. Equity Securities (Stocks) to Shareholders’ Equity
From Assets Allocations (%) chart and Stock to Shareholder's Equity (%) chart, we can see that Warren Buffett reduced Berkshire’s stock positions dramatically in 1998, indicating he was very bearish on stocks. He then steadily decreased cash positions and bought more stocks until 2003. After that, Berkshire’s stocks level went up a little bit to 56.95% at the end of the third quarter of 2008. There was another dramatic decline of stocks position from 9/30/2008 to 3/31/2009, probably because the stocks’ value shrunk during financial crisis. The stock percentage hit above 50% at the start of 2014 and dropped below 40% shortly in 2016, at that time Buffett bought Apple for the first time. The percentage of equity securities starts the upward trends since then.
For the recent quarter, Berkshire's stocks relative to equity ratio is about 62.35%, which is low relative to most of the time since 1995, but is around its 10-year high and much higher than bonds and cash. Thus, it is likely that Warren Buffett is relatively bullish on stocks.
Buffett Asset Allocation Conclusion
Warren Buffett is known for not caring about what others do in the stock market. But from his asset allocations we can get some idea on where he is finding value among stocks, bonds and cash. Apparently he is bearish with bonds as the percentage of bonds is at the lowest level. As for stocks, he is relatively bullish. Stocks are now his largest position relative to bonds and cash. And Berkshire has been buying more companies recently. For the details of what Warren Buffett is buying, please go to Warren Buffett’s stock picks.
Related Links:
- Buffett was worried about the overvaluation of the market
- Shiller P/E
- Warren Buffett’s stock picks
- Warren Buffett's Undervalued Stocks
- Warren Buffett's Top Growth Companies
- Warren Buffett's High Yield stocks
- Stocks that Warren Buffett keeps buying
