Buffett's bold retirement, what unknown secrets does he hold?

As U.S. stocks continue to hit new highs, the world's most watched investor feels uneasy about investing. Should others be concerned about this?

"Oracle of Omaha" Warren Buffett once joked that his favorite holding period for stocks is "forever." Although he continues to invest heavily in American companies, he has never taken so much money off the table—up to $325 billion in cash and equivalents, most of which is in the form of Treasury bills.

To understand the scale of these cash reserves, consider this: Berkshire Hathaway could write a check to every company except for about 25 of the most valuable publicly traded companies in the U.S. with the remaining money.

In addition to letting dividends and interest pile up on the balance sheet, the conglomerate has also significantly reduced its stakes in its two largest holdings—Apple Inc. (AAPL) and Bank of America (BAC)—over the past few months. Furthermore, Buffett's Berkshire Hathaway (BRK) has halted stock buybacks for the first time in six years.

Does this mean that ordinary investors should take a cautious stance toward the market? Perhaps, but these actions provide more insight into Berkshire.

First, Buffett and his late business partner Charlie Munger have outperformed the stock market by 140 times, not because they are "timers" of the market. As Munger's most famous saying goes, the first rule of compounding is: never interrupt the process unless absolutely necessary. Investors closely watching Berkshire, hoping for its magic to work in their portfolios, are very focused on what Berkshire is buying and selling, but rarely on when to buy and sell.

However, the seemingly always optimistic and patient Buffett has also become cautious in the past; he closed his extremely successful partnership in 1969, stating that the market bubble was too large, and accumulated a significant amount of cash in the years leading up to the global financial crisis (which he ultimately used for speculation).

"He recognizes the reality of market volatility and extremes," says Adam J. Mead, a fund manager from New Hampshire who specializes in Buffett's investment philosophy and is the author of "The Complete Financial History of Berkshire Hathaway."

Overvalued stock prices do not mean they are on the brink of a crash or bear market, but we should look further to see what current valuations mean for returns in the coming years (both good times and bad times).

Goldman Sachs strategist David Kostin recently predicted that the annual average return of the S&P 500 index over the next decade will be only 3%, less than one-third of the post-war average. In a time of high investor optimism, Kostin's report sounds like a scratched record, but it aligns with other forecasts.

Recent predictions from major asset management firm Vanguard also show that the annual return for large U.S. stocks over the next decade will be between 3% and 5%, while growth stocks will see annual returns of only 0.1% to 2.1%. The cyclically adjusted price-to-earnings ratio (CAPE) advocated by Nobel laureate Robert Shiller aligns with an average annual return of about 0.5% after adjusting for inflation, which is similar to Kostin's prediction The simpler "Buffett Indicator" is similar; Buffett once referred to it as "possibly the best single measure of valuation at any given moment." This indicator has various variations, but it essentially represents the ratio of all publicly traded stocks to the size of the U.S. economy. For example, the Wilshire 5000 Index is currently around 200%, indicating that stock valuations are higher than during the peak of the tech bubble.

Given that the yield on U.S. Treasury bonds is currently higher than the expected return on stocks, Buffett seems to have reduced his stakes as much as possible, fearing that high-risk stocks have no upside potential. However, he has publicly stated that he is willing to spend that money.

"What we really want to do is acquire great companies," he said at the Berkshire 2023 annual meeting. With a massive cash reserve, "if we can acquire a company for $50 billion, $75 billion, or $100 billion, we can do it."

Berkshire's market capitalization has exceeded $1 trillion. Mead explained that based on the current balance sheet, the transaction value that would match the 2010 acquisition of Burlington Northern Santa Fe or the 1998 acquisition of General Re would reach $100 billion.

Does this also mean that Buffett believes it is valuable to reserve "dry powder" before the next crisis or bubble burst? Yes, although he did not say so. On the other hand, his choices are not universal; individual investors have more options than he does.

First, individual investors do not need to pay a premium of 20% or more over market price when acquiring a company like Berkshire does. Additionally, individual investors can invest in non-U.S. markets and small-cap stocks. For example, Vanguard expects a future 10-year return of 7% to 9% per year for developed market equities outside the U.S., compared to 5% to 7% per year for U.S. small-cap stocks.

However, aside from a very profitable bet on Japanese trading companies in recent years, Buffett's funds remain primarily concentrated in the U.S. and are likely to continue that way.

Changes at Berkshire are inevitable, not only because the 94-year-old is nearing the end of his extraordinary career. Buffett has unhesitatingly returned cash to shareholders, almost entirely through stock buybacks, but he now clearly believes that even his own stock is too expensive.

Berkshire's massive scale also makes it impossible to replicate its long-term record of deploying profits and easily beating the market. Mead believes it will have to return money in some way—possibly through dividends. Ultimately, this evolves into the necessity of interrupting compounding