Warren Buffett Sends a $382 Billion Warning to Wall Street. Are You Paying Attention?

Key Points

Berkshire Hathaway's cash holdings reached another record in the third quarter. Buffett tends to be fearful when the market is greedy. Investors need to be prepared for investing opportunities. 10 stocks we like better than Berkshire Hathaway ›

When Warren Buffett steps down as CEO of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) in a few weeks, he'll be leaving with the reputation as perhaps the greatest investor of his time -- if not all time. Buffett dispenses advice quite freely but doesn't tell investors everything on his mind all the time. If you follow his trading activity, though, you'll also learn a lot about his strategy.

One thing followers have noted over the past two years is that Berkshire Hathaway is quietly hoarding cash. Buffett will be the first one to tell you that it's important to be in the market and stay in the market no matter what's happening around you. He isn't changing his tune, so the fact that he added to the cash pile again in the third quarter, bringing the total to a record $382 billion, is a sure signal. So what's Buffett telling the market?Image source: The Motley Fool.

Slow and steady vs. quick and decisive

Buffett is a big proponent of the buy-and-hold investing philosophy. He has famously said that his favorite holding period is forever, but investors sometimes miss the fact that, while it may be his favorite holding period, it's actually unusual for him to hold onto any stock for too long.

He has mentioned three stocks he would never sell: Coca-Cola, American Express, and Apple, although he has sold off part of the company's position in Apple. There are usually around 45 stocks in the Berkshire Hathaway equity portfolio at any given time, so he's definitely not holding onto too many stocks forever. However, he also isn't day trading or buying and selling based on market sentiment.

Buffett and his team visit companies he's potentially investing in, often taking a long time to understand the fundamentals before he acquires or invests in a company. He's likely to hold onto a stock for only as long as it makes sense for Berkshire Hathaway.

For individual investors, he sees this as an effective strategy. "We don't think it's improper actually for people who are passive investors just to make a few simple investments and sit for their life in them," he said at this year's annual meeting.

At the same time, he has credited a handful of times when he was presented with an amazing opportunity for the majority of Berkshire Hathaway's success. The Oracle of Omaha considers it a crucial trait for an investor to be able to take quick and decisive action when those opportunities knock.

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In fact, it was the single trait Buffett pointed out about Greg Abel in Berkshire's most recent annual letter. "Often, nothing looks compelling," Buffett said when explaining how he deploys capital. "Very infrequently, we find ourselves knee-deep in opportunities. Greg has vividly shown his ability to act at such times as did Charlie [Munger]."

Cash at the ready

Buffett makes two things pretty clear in that statement. One, there are times when not much looks compelling. Buffett's cash pile is growing, likely because he doesn't see many attractive opportunities.BRK.B cash and short-term investments (quarterly) data by YCharts.

The second thing is that in order to benefit from the opportunities that do come up, you have to have a certain amount of cash on hand. He explained at the meeting this year that he would much prefer if market conditions were such that he'd only have $50 billion lying around, but that's not how the market works.

"We have made a lot of money by not wanting to be fully invested at all times," he said."If you told me I had to invest $50 billion every year until we got down to $50 billion, that would be the dumbest thing in the world."

Is this a warning?

Let me state the obvious: If this were a buyer's market, Buffett wouldn't be stockpiling cash. The de facto conclusion is that this is not a buyer's market.

Buffett has warned about this kind of market many times. In contrast to the investor who loves a bull market, Buffett fears them. Arguably, his most famous quote is all about being greedy when the market is fearful, and fearful when the market is greedy. "Stocks can't outperform businesses indefinitely," he said at the time.

Don't get confused by the warning

The last thing Buffett would tell investors to do is to get out of the markets. He's a big believer in the stock market, the U.S., and the country's future.

Despite the stockpile, Buffett is still buying. Berkshire Hathaway made a large investment in UnitedHealth Group when its price-to-earnings ratio (P/E) fell to under 10. That is exactly the kind of opportunity he talks about -- an excellent company that had a short-term drop.

However, considering today's market euphoria, investors need to be careful and choosy. They also need to know going in that there could be volatility on the way. The way to prepare is to make sure you have some safe stocks, be prepared to ride the waves without selling, and have some cash ready to pounce on good deals.

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American Express is an advertising partner of Motley Fool Money. Jennifer Saibil has positions in American Express and Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

Warren Buffett Sends a $382 Billion Warning to Wall Street. Are You Paying Attention? was originally published by The Motley Fool

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