Investors are driving what seems to be the most expensive stock market in decades, billionaire investor David Einhorn writes in his hedge fund's quarterly letter. He highlights that Warren Buffett is cashing out during this bull run.
According to Greenlight Capital's letter, equities are more overvalued than they've been since the firm was founded in 1996.
Now may not be the ideal time for high equity exposure, the fund notes, citing Buffett’s recent stock sales as evidence.
"While Mr. Buffett often reminds us that timing the market is impossible, it's hard not to notice that he’s one of the best market timers we've seen," Greenlight says.
Buffett, the renowned Berkshire Hathaway investor, has been steadily reducing equity positions, opting to hold a substantial amount of cash. By mid-August, he amassed a record $189 billion cash pile and has continued to take profits from successful stocks.
Greenlight doesn’t view Buffett’s actions as a signal of an impending market crash, but the letter emphasizes that the "Oracle of Omaha" has a knack for reducing exposure at pivotal moments. For example, Buffett closed his investment partnership before the market peaked in the 1960s and sold positions before the 1987 crash.
“One could argue that avoiding bear markets has been an overlooked factor in his exceptional long-term returns,” the letter observes. “It’s significant to note that Mr. Buffett is once again selling large portions of his stock portfolio and accumulating vast cash reserves.”
The letter suggests that these moves hint it might be prudent to hold off on high equity exposure until better opportunities arise in the near future.
That said, Greenlight isn’t implying the market is in a bubble. However, the firm points out that high price-to-earnings ratios are concerning, especially given the cyclical highs in corporate earnings, and dividend yields are notably low.
While other market watchers have also remarked on the market's lofty valuations, Greenlight argues the problem extends beyond just the “nosebleed valuations” of major tech stocks. Even well-established, industrial companies tied to cyclical and growth sectors are trading at 30 to 50 times earnings, the letter notes.
In response to these concerns, Greenlight has adopted a conservative approach, maintaining very low exposure to equity beta. The fund reported a 1.1% return for the third quarter, compared to the S&P 500’s 5.9% gain.
Despite its cautious stance, Greenlight isn’t entirely bearish. Although it expects to continue underperforming the broader market in the short term, the fund highlights its successful investments in gold and Green Brick Partners as key contributors to this quarter’s returns.
