Officially, Warren Buffett doesn’t make predictions about what the stock market is going to do. But the Berkshire Hathaway CEO has an uncanny knack for seeing trouble coming.
Buffett has been actively reducing Berkshire’s stake in both Apple and Bank of America recently. And while they initially seemed like mistakes, they now look like incredible decisions.
Market timing
During the fourth quarter of 2023 – when Buffett started selling off Berkshire’s stake in Apple – the stock traded at prices between $166 and $199. After that, it got up to $255.
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That makes the decision to sell look unwise. But earlier this week, the stock fell back to $169, meaning the Oracle of Omaha’s move was almost certainly a good one.
The same is true with Bank of America. Buffett sold a lot of shares at prices between $39 and $44, but the stock got up to $48 – a clear 10% above where Berkshire reduced its position.
In the recent volatility, however, the stock fell right the way back to $33. Again, that makes the decision to sell at higher prices look like an extremely intelligent one.
How does Buffett do it?
Buffett’s skill as an investor is remarkable. But the secret to his success isn’t his ability to forecast where the stock market is going to go – it’s something quite different.
Instead of looking directly at share prices, Buffett focuses on businesses. Over the long term, the amount of cash a company makes is the clearest sign about where its share price is going.
Exactly when the stock market catches up to the reality of the underlying business isn’t something the Berkshire CEO takes a view on. But Buffett is clear this happens sooner or later.
Whether it’s buying or selling, this is the guiding principle that informs Buffett’s investment decisions. And it’s the reason they’ve generated such strong results over the last 60 years.
An example
I think RELX (LSE:REL) is a good example of this kind of thinking. Like Apple, the FTSE 100 analytics company is a high-quality outfit – but it might be hard to justify the current share price.
The stock has a market cap of just over £72bn and the business made just over £2bn in free cash last year. That implies a return of just under 3%, which isn’t particularly outstanding.
For the current share price to make sense, the company is going to have to grow significantly. And this isn’t entirely out of the question with the emergence of artificial intelligence.
Over the last decade, though, revenue growth has been steady without being spectacular. And this is why I think investors might want to consider other opportunities at the moment.
Long-term investing
Buffett’s big advantage over the stock market is time. Short-term movements in share prices are hard to forecast, but things are much easier to predict over the long term.
Berkshire Hathaway’s decision to sell Apple shares looked premature for quite some time. But the stock eventually came to trade at a level that justified the move.
In the UK, I think RELX might be in a similar position. So I think investors who own the stock and want to follow Buffett’s example might consider doing the same.
