Billionaire Warren Buffett Is Hinting at a Market Correction — but There Is a Silver Lining

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Investing legend Warren Buffett and his conglomerate, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), have not given investors many reasons to buy into the strength of this market. Recently, Berkshire has largely been a net seller of stocks, and has refrained from buying individual stocks or even repurchasing its own shares. Additionally, it has been building a hoard of cash and short-term Treasury bills that now exceeds $320 billion.

One might have speculated that the holding company was stockpiling cash in preparation for something big. But after its additional large sales of Apple (NASDAQ: AAPL) and Bank of America (NYSE: BAC) stock in the third quarter, one logical conclusion is that Buffett expects a market correction. That’s not exactly the type of news that investors might have hoped for, but it comes with a silver lining.

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By definition, a market correction is when a major broad index such as the S&P 500 pulls back by 10% to 20% from its recent high. Most corrections are eventually followed by recoveries that send those indexes back to new market highs, but for investors, such significant drops in their portfolios can be stressful.

Billionaire investor David Einhorn, who runs the hedge fund Greenlight Capital, has pointed out that while Buffett prides himself on being a long-term investor, he has also historically been good at timing market corrections.

  • Buffett closed his first fund — the Buffett Partnership — in 1969 after growing concerned about accounting malfeasance at a growing number of companies in the market.

  • Buffett then bought stocks after the market bottomed in the early 1970s following an oil crisis in 1973-1974. In 1974, Buffett purchased 11% of outstanding shares in the Washington Post.

  • In 1986, Buffett refrained from the “euphoria” on Wall Street and fled into bonds right before a broad market decline and 1987’s Black Monday.

  • Buffett and Berkshire didn’t get into trouble during the Great Recession. Instead, they took advantage and injected billions of dollars of capital into Bank of America and Goldman Sachs in deals that eventually generated phenomenal returns.

Part of Buffett’s success has been his ability to avoid being over-exposed during stock market downturns. Now, Buffett and Berkshire Hathaway again seem to be signaling that the market is overheated. This doesn’t mean the market will collapse tomorrow, but Buffett likely believes a shift in sentiment is upon us.

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