Warren Waits, and Wins

"The question of how long we wait, we wait indefinitely. We are not going to buy anything just to buy something." - Buffett (1998 Berkshire Hathaway Annual Meeting)

On May 3rd, 2025, Warren Buffett took the stage at Berkshire Hathaway’s annual meeting for his sixtieth and final time. For five hours, the ninety-five-year-old fielded dozens of long-winded questions. And in the morning session, Becky Quick of CNBC relayed a few from Advate Vasad, based in New York, and Mike Conway, from an unknown location:

“Beyond the need for liquidity to meet insurance obligations, is the decision to raise cash primarily a de-risking strategy in response to high market valuations? Or is it also a deliberate effort to position Berkshire’s balance sheet for a smoother leadership transition, providing Greg Abel with maximum flexibility and a clean slate for future capital allocation decisions?... Are you encouraged you may see some fat pitches coming your way?”

Buffett, witty and spry as usual, assured the audience he wouldn’t do anything so noble as to hoard cash and let Greg Abel, successor of the trillion-dollar enterprise, look good later on. An uproar of laughter ensued, then Buffett gave rationale: “We would spend $100 billion if something is offered that makes sense to us, that we understand, offers good value, and where we don’t worry about losing money.”

According to ValueLine (excluding Berkshire Hathaway itself), one hundred thirty-eight companies, amongst several thousands globally, boast a market capitalization equal to, or greater than, $100 billion. What’s more, Buffett, Abel, Combs, and Weschler are hunkered into a circle of competence with ultra-thick, slow-expanding barriers. Only a handful of businesses satisfy the investment coterie’s tastes, and bull market valuations have tarnished the shiniest of golden geese. So until gloomier days arrive, Berkshire’s cash account will continue to swell. Still responding to Conway and Vasad, Buffett added:

“The problem with the investment business is that things don’t come along in an orderly fashion, and they never will. I’ve had about 16,000 trading days in my career. It would be nice if every day you got four opportunities or something like that, with equal attractiveness.”

Over those roughly sixteen thousand trading days, the stock market’s capricious behavior tantalized ordinary retail speculators and sophisticated hedge funds alike. Most participants ignored business fundamentals, basked in dopamine-filled garrulity, bought stocks on a whim, and sold on BREAKING NEWS (good or bad). Not Buffett, though – who, with a hyperrational, methodical, and meticulous approach, consistently profited from impetuous competition.

Buffett understands Berkshire Hathaway as a painting with an ever-expanding canvas. Episodic brushstrokes range from gentle dabs — Dairy Queen in 1997, for $585 million, or Justin Industries in 2001, for approximately $600 million, to intense smears — Coca-Cola in 1988, for $1 billion, BNSF Railway in 2010, for $26.5 billion, and Apple, with hefty purchases throughout 2016 to 2018, totalling $35.9 billion. Unlike most investors, Buffett lets the paint dry.

However, a stubborn bull market, raging on six hundred two days for a gleeful sixty-five-odd percent return, has forced Buffett to put his palette away. Over the past year or so, Berkshire lopped 615,650,382 shares of Apple, the most magnificent of the magnificent seven, and 401,278,475 shares of Bank of America, a stalwart of the United States financial system, and now owns $342.2 billion worth of treasury bills – a gargantuan position eclipsing Pakistan’s gross domestic product.

Such a drastic pivot out of stocks is reminiscent of Buffett’s earlier days, when the thirty-eight-year-old guru closed his investment partnerships. The year was 1969 – Richard Nixon was the 37th President, Neil Armstrong took one giant leap for mankind, and the Dow Jones average closing price was 875.72. Frustrated by a frothy market, Buffett sent a letter to his partners, dated May 29th, announcing his retirement. In the third paragraph, he laid out a few reasons for his abrupt departure:

“However, it seems to me that: (1) opportunities for investment that are open to the analyst who stresses quantitative factors have virtually disappeared, after rather steadily drying up over the past twenty years; (2) our $100 million of assets further eliminates a large portion of this seemingly barren investment world, since commitments of less than about $3 million cannot have a real impact on our overall performance, and this virtually rules out companies with less than about $100 million of common stock at market value; and (3) a swelling interest in investment performance has created an increasingly short-term oriented and (in my opinion) more speculative market.”

Fifty-six years later, Buffett’s wallet is again too fat due to a stock market that’s flown over the cuckoo’s nest. Consider Costco, one of Charlie Munger’s obsessions, valued at 63x trailing earnings, Netflix at 47x, Nike, down sixty-five percent from four years ago, still at 18x, Fair Isaac at 90x, or Apple at 36x (which Berkshire bought for around 10x). Most jarring, and perhaps the embodiment of this sweeping euphoria, is MicroStrategy, which borrows money to purchase bitcoin (rat poison), trading at 93x “earnings”.

Although Bill Ackman, CEO of Pershing Square, recently argued that some higher-quality, growth businesses are worth the premium. In a podcast with the Boyar Value Group, dated February 27th, 2025, Ackman audaciously declared:

“Warren sort of has this price discipline where if it trades for more than 10 times operating income, no matter how good the business, he won’t buy it, and that’s worked really well for him for 60, 70 years, [so] why should he change? … But we’re in a world where there’s some amazing businesses that have very long-term growth trajectories, where you have to pay more than 10 times operating income to succeed in buying a stock or buying a business.”

Putting his clients’ money where his mouth is, Ackman has accumulated large positions in Uber and Google, which trade at 45x and 33x earnings. Of course, the valuation of a business isn’t deducible from any given ratio; however, Ben Graham, Buffett’s mentor, advised against paying more than 20x earnings.

Graham didn’t believe lofty multiples were permanent, and in May of 1958, he delivered an address before the annual Convention of the National Federation of Financial Analyst Societies titled “The New Speculation in Common Stocks” (another timeless, though more obscure piece).

In it, Graham claimed the speculative elements of a stock, in the past, mainly came from the business itself, but were now from security analysts' attitudes, and their “primary emphasis upon future expectations”.

To illustrate this phenomenon, Graham used General Electric as an example, a “towering enterprise” with fifty-nine years of earnings and dividends From 1902 to 1946, G.E.’s earnings per share increased a measly thirty percent, yet the stock was a rollercoaster; its “price-earnings ratio rose from 9 times in 1910 and 1916 to 29 times in 1936 and again in 1946”.

In 1947, G.E. reverted to 9x earnings, and Graham left words that today’s investor would do well to grapple with:

“This striking reversal took place only eleven years ago. It casts some little doubt in my mind as to the complete dependability of the popular belief among analysts that prominent and promising companies will now always sell at high price-earnings ratios—that this is a fundamental fact of life for investors and they may as well accept and like it. I have no desire at all to be dogmatic on this point. All I can say is that it is not settled in my mind, and each of you must seek to settle it yourself.”

… Here’s a link to The New Speculation In Common Stocks, which can also be found in the appendixes of The Intelligent Investor (revised edition) by Benjamin Graham (updated by Jason Zweig).