In his most recent Q3 2024 Letter, David Einhorn discusses Warren Buffett’s impressive ability to sidestep market downturns, a skill that has contributed significantly to his long-term success.
Despite Buffett’s belief in the impossibility of timing markets, his actions—such as closing his fund in the 1960s, buying at the 1970s bottom, and holding cash before the 2008 financial crisis—demonstrate strategic market positioning.
Currently, Buffett is selling stocks and accumulating cash, signaling caution about current high valuations. Einhorn observes that valuations are stretched, even among industrial stocks, with elevated P/E ratios and low dividend yields, suggesting future investment opportunities may emerge after this overheated market cools.
Here’s an excerpt from the letter:
Warren Buffett is, of course, the most successful investor of his generation, and maybe of all time. While Mr. Buffett routinely points out that it is impossible to time the market, we can’t help but observe that he has been one of the best market timers we have ever seen.
When the market got too frothy in the late 1960s, he closed his fund. Towards the market bottom in the early 1970s, he re-emerged as a stock picker and then prior to the 1987 crash, he sold everything except a couple of illiquid holdings.
Later, he sidestepped the various crises in corporate credit and was well-positioned to capitalize on the 2008 global financial crisis. One could argue that sitting out bear markets has been the underappreciated reason for his outstanding long-term returns.
It is therefore noteworthy to observe that Mr. Buffett is again selling large swaths of his stock portfolio and building enormous cash reserves.
Our sense is that Mr. Buffett’s portfolio adjustments are not a prediction that the market will fall next week, next month, or even next quarter. Rather, these stock sales more likely express a long-term view that right now is not a great time to have a lot of equity exposure, and that the opportunity set is expected to be better at some point in the not-so-distant future.
We will avoid calling this market a bubble, and simply observe that the dividend yield is low and the P/E ratio is elevated despite corporate earnings being cyclically high, if not top-of-cycle.
This time, it is not just a handful of high-profile technology companies with nosebleed valuations. In fact, it is easy to find mature, industrial businesses with cyclical exposure and growth prospects that aren’t materially better than the current nominal GDP growth rate that currently trade for 30-50x earnings.
Obviously, the market appreciation thus far in 2024 has exceeded the growth rate of revenues and earnings. We think Paul Tudor Jones is right when he says that managing the last third of a great bull or bear market move is often the toughest.
You can find a copy of the letter here:
David Einhorn – Greenlight Capital – Q3 2024 Letter
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