MW Warren Buffett's waiting for a 'wild swing' to the downside for stocks, says veteran Berkshire watcher

By William Watts

Warren Buffett didn't tip his hand in his annual letter to investors on Saturday, but it he appears to be waiting for a big-time downturn in stocks before deploying his vast and growing cash hoard, according to a closely followed value investor and longtime observer of the Berkshire Hathaway chairman.

In the letter, Buffett offered little that was useful in the way of guidance, but what he did indicate was that he sees "nothing compelling" in terms of buying opportunities, that Berkshire continues to add to its cash hoard, and that Buffett is prepared for "wild swings" in stock values, Bill Smead, founder and chairman of Smead Capital Management, told MarketWatch on Monday.

"Read between the lines...and he's not going to be interested in buying until we have a wild swing to the downside," said Smead, who has been paying close attention to Buffett and Berkshire Hathaway $(BRK.A)$ $(BRK.B)$ for four decades.

And by a "wild swing," Smead doesn't mean a garden-variety correction. He thinks Buffett is bracing for a bear market on par with the drops that followed the bursting of the dot-com bubble in 2000, when the S&P 500 SPX fell 49.1% peak to trough, or the declines during the bear markets of 2007-2009 or the late 1960s and early 1970s.

In his letter, Buffett took note that commentators have made much of Berkshire's growing pile of cash and cash-equivalents, which rose further above $300 billion as of the end of fiscal 2024. Buffett insisted that Berkshire would always prefer owning businesses - either controlling or largely controlling them outright or buying shares of great companies - over cash.

"Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won't change," Buffett wrote. (Read the letter here.)

At the same time, Berkshire was a net seller of $134 billion in stock in 2024. And Buffett has previously lamented the difficulty in finding attractive opportunities.

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For his part, Smead has argued that investors should prepare for a "Noah stock market." In other words, a long, hard rain is going to fall. In a recent note, he argued that investors should build a common stock portfolio "which will float when the multiyear bear market creates a waterfall of selling among the magnificent growth stocks and passive S&P 500 owners."

Smead contends the biggest threat is inflation. Investors cheered stocks to another round of all-time highs in the wake of Donald Trump's presidential election victory, likening the moment to Ronald Reagan's 1980 victory and the subsequent start of a multiyear bull market. The rub, Smead said, is that runaway inflation was soon snuffed out following Reagan's victory, while now inflationary pressures appear to be building.

"We are assuming that inflation won't back down. Ask the dockworkers or Boeing machinists what a long-term union contract that raises your income 8.5% per year compounded means," Smead argued in his recent note.

In his letter, Buffett warned against "fiscal folly," which can evaporate the value of paper money. "In some countries, this reckless practice has become habitual, and, in our country's short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency," Buffett said.

Smead said he didn't take that as an explicit warning about inflation. "What little he said [in the letter] that was to the point was so subtle, you would have to be an expert in subtlety to find it," he told MarketWatch.

Smead boiled Buffett's message down to this: "Do as I do, not as I say. Build up cash and don't be too anxious to buy."

-William Watts

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February 24, 2025 16:20 ET (21:20 GMT)

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