Warren Buffett made one thing clear in his 2024 letter to shareholders this year: He prefers to keep the great majority of Berkshire Hathaway's (BRK.A 2.87%) (BRK.B 2.27%) money invested in equities.

That might seem at odds with the changes he made in his company's portfolio last year. Specifically, Buffett sold $143 billion worth of publicly traded equities, including large portions of its stakes in Apple and Bank of America. Meanwhile, Buffett added just $9.3 billion in new purchases during the year. Buffett even stopped repurchasing shares of his own company's stock in the back half of the year. Combined with strong operating results from its core businesses, Berkshire's pile of cash and Treasury bills soared to $334 billion by the end of December.

But there's a clear reason Buffett's preferences to keep money invested in equities and his actions in 2024 don't quite align. And the $3 billion he invested in the fourth quarter across five stocks is a clear indication of his current preference in the stock market.

Image source: The Motley Fool.

Here's what Buffett's buying

Berkshire Hathaway filed form 13F with the Securities and Exchange Commission (SEC) in mid-February disclosing its portfolio holdings as of the end of 2024. The filing showed six new purchases in the fourth quarter. One was Occidental Petroleum, which Berkshire has invested in since 2019. I want to highlight the other five:

• 5.6 million shares of Constellation Brands
• 1.1 million shares of Domino's Pizza
• 12.3 million shares of Sirius XM
• 456,000 shares of Verisign
• 195,000 shares of Pool Corp.

Buffett invested a combined $3 billion across those five companies in the fourth quarter based on Berkshire's statement of cash flows and other SEC disclosures.

All five point to a clear preference for Buffett right now. They're all relatively small companies. Constellation is the biggest of the group with a market capitalization of $32 billion. Combined they have a total value of less than $93 billion as of this writing. Considering Berkshire already owns substantial portions of several of those companies, Buffett could've bought out the entire lot with the proceeds from his 2024 stock sales even after paying taxes and still had plenty of cash left over.

The point is that Buffett still thinks there are a lot of stocks in the market that present good value for investors. But he simply can't invest enough capital to offset the massive amount of cash raised by selling its biggest large-cap stocks like Apple ($3.6 trillion market cap) and Bank of America ($339 billion market cap).

Any other investment manager deploying $9.3 billion in equity purchases for the year probably wouldn't be seen as bearish on the stock market. But Berkshire's size makes it much harder for it to find investments that will offset any significant sales in its portfolio. Buffett warned investors of the situation a year ago in his 2023 letter to shareholders:

There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't. And, if we can, they have to be attractively priced.

At this point, Buffett doesn't seem to think any of that handful are attractively priced.

The clear message for investors

Berkshire's net sales of about $134 billion of equities in 2024 isn't a sign that investors should run away from the stock market. It's merely a sign that investors need to be more prudent in their investment selection. And if you look closer at Buffett's purchases, the preference for smaller companies stands out.

That preference aligns with current market valuations for mid-cap and small-cap indexes relative to the large-cap S&P 500. The S&P 500 currently trades for a forward price-to-earnings (P/E) ratio of 21.8, which is one of the highest valuations of the index since the dot-com bubble. While that doesn't mean a crash is coming, it does mean large-cap stocks trading below their intrinsic value are very hard to find.

By comparison, the S&P 400 mid-cap index and the S&P 600 small-cap index trade for forward P/Es of 15.6 and 15.3, respectively. That means there are a lot more attractive value stocks in the small- and mid-cap indexes. Unfortunately for Buffett, those stocks can't absorb a purchaser whose definition of a "small investment" is several hundred million dollars. That makes them practically a waste of time for Buffett to research, but they could provide a lot of upside for an individual investor with a normal-sized portfolio.

If you don't want to research individual stocks, you might want to diversify away from more expensive large-cap stocks by buying an index fund. Vanguard offers the Vanguard Extended Market ETF (VXF 1.32%), which tracks the performance of virtually all U.S. stocks not included in the S&P 500. You could also buy index funds tracking the mid-cap and small-cap indexes.

As you look to follow Buffett's moves in the market, it's important to remember that he's playing a significantly different game than individual investors. There are a lot more options available for smaller investors, and if you pay attention to what Buffett says and how he manages his portfolio within his own constraints, you could end up benefiting greatly in the long run.