One thing more than any other has struck me about the US stock market lately: the relentless selling of Warren Buffett. Not only has he been selling large chunks of his holdings in companies like Apple (NASDAQ: AAPL), but he has then basically been sitting on the money rather than reinvesting it. His cash pile is around $325bn.
Is there really nothing on sale that tempts Buffett to spend some (or all) of that money?
We do not know.
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Maybe he is saving the money for a specific purpose yet to be revealed. Meanwhile, his reduced Apple stake can be seen as smart diversification. After all, a soaring share price in recent years had meant that the tech giant came to represent an oversized part of his portfolio.
Nonetheless, the fact that Buffett has been selling and not buying to the extent that he now sits on such a vast cash pile makes me question where he thinks the stock market may be heading.
Perils of market timing
We know that the stock market will crash sooner or later. But we do not know when.
Trying to time the market can be dangerous. It can mean missing out on some great periods of performance.
Buffett himself often talks about investing in great companies at attractive prices then holding them for the long run. That said, he has certainly taken advantage of past stock market crashes to swoop in and pick up some bargains.
Getting ready for a crash
I think that approach makes sense for me as a small private investor too.
Apple looks like a good company to me from a business perspective. Yes, revenue growth was relatively modest last year and earnings fell compared to the year before. But they still came in at around $84bn, a massive number.
The company benefits from a large market that is likely to keep demand for digital products and services high for decades to come. With a good brand, very large installed user base, and range of proprietary technologies, the company could remain a profit machine long into the future.
Apple faces risks such as increasingly sophisticated rival products from cheaper brands. But as an investor, what puts me off buying Apple shares for my portfolio at the moment is not such risks. Rather, it is the valuation. Apple trades on a price-to-earnings ratio of 37. That seems expensive to me even for a great business.
Prices can stay high for a long time and may even spend years getting higher. But, like Buffett, I focus on fundamental valuations when assessing whether to buy shares and also when thinking about whether to hang onto investments I already own.
I think high valuations of many shares, especially in the US, could mean we see a stock market crash next year. But that has been true for some time already and the market is still riding high.
So rather than focus on market timing, I am spending time updating my shopping list of shares to buy if I can get them at what I think is an attractive price after the next crash.
