Guosen: Buffett's market timing effect.

Guosen Economic Research Institute's chief economist team recently released a research report stating that Warren Buffett, as a generation of investment masters, has gone through multiple bull and bear cycles while maintaining outstanding returns. Investment returns are the realization of cognition, and his investment philosophy is worth studying in depth. Looking back at Buffett's positioning operations, Guosen has summarized three insights: First, cash position management is crucial to deal with market uncertainties; second, adhere to the value investment philosophy, reduce positions against the trend when the market is overvalued, and increase positions against the trend when undervalued; and third, when sudden events cause market sharp declines, dare to increase positions. The first point emphasizes the importance of cash position management to deal with market uncertainties. Keeping the cash ratio within a certain range of fluctuations can give you the upper hand during market volatility. Buffett's ability to add positions during major market declines is due to having cash on hand. Since 2003, Buffett's average cash ratio has been 15.1%, with a median of 14.7%, ranging from a high of 20-30% to a low of 6-10%. The second point emphasizes sticking to the value investment philosophy. Buffett and other investment masters practice value investing, which generally includes four main elements: buying stocks means buying companies, using Mr. Market wisely, maintaining sufficient margin of safety, and understanding one's circle of competence. The well-known saying "be fearful when others are greedy, and be greedy when others are fearful" is an example of using Mr. Market wisely. Looking back at Buffett's operations, he is willing to reduce positions when the market is overvalued and increase positions when undervalued. The changes in positions are a result of this. The third point emphasizes the importance of being willing to add positions during market sharp declines caused by sudden events. When sudden events occur, investors' emotions are affected, leading to sudden market declines. Quality companies are often mistakenly undervalued in the short term, providing rare opportunities to buy good companies at low prices, requiring the courage to take action. Markets often quickly rebound after a sharp decline, offering the opportunity to moderately reduce positions and return the cash ratio to normal values. On November 10th, Buffett announced his official retirement at the end of the year in his annual shareholder letter. As one of the most influential investment masters globally, Berkshire Hathaway, under his leadership, has achieved a cumulative return of 55,022 times from 1965 to 2024, with an annualized return of 19.9%, significantly outperforming the S&P 500's cumulative return of 390 times and an annualized return of 10.4%. Due to his long-term excellent compound returns, Buffett is known as the "Oracle of Omaha", and his outstanding stock-picking ability is self-evident. In recent years, Berkshire Hathaway's cash holdings have continued to rise, exceeding 30% as of 2025 Q3. Buffett's trimming of positions is worth reflecting on. This article analyzes Buffett's timing effects based on historical data. 1. Berkshire Hathaway has made six significant positions adjustments Analyzing the actual changes in stock holdings in Berkshire Hathaway's quarterly balance sheets requires processing the raw data. We primarily focus on two indicators: stock holdings and cash positions. An increase in stock holdings + cash proportion implies an increase in positions, while a decrease in stock holdings + cash proportion indicates a reduction in positions. For stock assets, the most explanatory indicator is "actual stock position adjustments." Starting from the previous period's stock assets as the original value, the theoretical stock market value for the current period is estimated based on the same period's S&P 500 index fluctuations. By subtracting the actual stock market value disclosed for the current period from the theoretical stock market value, we can obtain the actual stock position increase or decrease amount for the current period. This indicator can roughly eliminate the influence of stock price fluctuations, thereby capturing Berkshire Hathaway's active trading behavior. For cash assets, we mainly refer to the "book cash ratio," which is the proportion of Berkshire Hathaway's book cash and cash equivalents to total assets at the end of each quarter. This indicator includes both new fund inflows and outflows from other assets such as stocks. Combining the above two indicators, since 1990, Buffett has had six significant positions adjustments, with increases occurring in Q4 2007-Q3 2009, Q3 2011, and Q1-Q2 2022, while decreases occurred in Q4 2002-Q3 2004, Q2 2016-Q2 2017, and Q1 2024-Q3 2025. 2. Strategic adjustment of cash positions: Decreasing positions from Q4 2002 to Q3 2004 Following the dot-com bubble in the early 21st century, Buffett strategically adjusted his cash positions by significantly reducing positions. From Q4 2002 to Q3 2004, Berkshire Hathaway steadily decreased its stock holdings, with a cumulative actual decrease of approximately $7.3 billion, reducing its book stock asset size to around $2.3 billion by the end of 2004. This period marks a systemic rise in Berkshire Hathaway's book cash ratio. From 1990 to 2002, Berkshire Hathaway's average book cash ratio was 4.5%, with a median of 3.9%. However, from 2003 to 2025, the average book cash ratio climbed to 15.1%, with a median of 14.7%. In retrospect, Buffett's increase in cash positions helped him deal with the high volatility of the US stock market that followed. From 1982 to the early 2000s, the US stock market experienced an 18-year bull market, with the S&P 500 delivering an annualized return of 16.5%. During this period, there were only two years of decline, each not exceeding 10%. Maintaining a high position was the optimal strategy at that time. However, after the burst of the dot-com bubble, the S&P 500 exhibited significantly increased volatility, with drops exceeding 20% in 2008 and 2022. From 2003 to the present, the S&P 500's annualized return fell to 9.9%. In this context, managing cash positions became even more crucial. 3. Adding positions during market panic declines: Q4 2007 to Q3 2009 Following the outbreak of the 2008 financial crisis, Buffett significantly increased positions. Before the financial crisis, Buffett adopted a defensive strategy, with Berkshire Hathaway's book cash ratio reaching as high as 18% by the end of June 2007. Starting from Q4 2007, as the stock market continued to decline, Buffett continued to increase his positions, especially during the panic-induced declines in Q3 and Q4 2008. At those times, Buffett significantly increased positions, with a cumulative actual increase of $22.5 billion over two quarters, bringing Berkshire Hathaway's cash ratio below 10% by the end of 2008. Subsequently, from 2009 to 2015, Berkshire Hathaway maintained high stock positions, with cash ratios ranging from 7% to 12%. Looking back, Buffett's contra-trading strategy in buying excellent companies during market panics has shown remarkable results. Following the peak of the US housing market in 2006, defaults surged, and subprime products plummeted. In 2007-2008, Bear Stearns and Lehman Brothers went bankrupt consecutively, triggering a global financial crisis. In the latter half of 2008, the US stock market experienced significant declines, with the S&P 500 PE ratio swiftly dropping from a high of 18 to a low of 10. At one point, it fell below the mean value by 2 standard deviations since 1990. Buffett seized the opportunity to buy high-quality assets such as Goldman Sachs, Swiss Re, General Electric, and BNSF Railway at discounted prices during the market panic. These quality assets experienced deeper declines during the crisis, allowing Buffett to acquire "true good companies" at cheap prices. The subsequent rise in share prices after the crisis was also substantial, as shown in the chart. This operation is a typical example of "be greedy when others are fearful." 4. Systemic reduction in positions during high valuations: Q2 2016 to Q2 2017 After years of continuous US stock market growth, Buffett began to reduce positions in 2016-2017. Following the 2008 financial crisis, the US stock market entered a bull run that lasted 7 years under the stimulus of quantitative easing policies. Starting in Q2 2016, Buffett gradually reduced stock holdings. In Q3 2016 and Q1 2017, Buffett made significant reductions in positions, with each quarter's reduction exceeding $100 billion. Berkshire Hathaway's book cash ratio rose from around 10% at the beginning of 2016 to around 16% by the end of 2017, maintaining this level until the end of 2023. During the market decline in 2018, Buffett made minor additions to positions. In retrospect, Buffett significantly reduced positions during high valuations, adding positions moderately during market adjustments. After the 2008 financial crisis, the US Federal Reserve began an era of zero interest rates, leading to a long bull market in US stocks starting in March 2009. However, beneath the prosperity, there were underlying currents. At the end of 2015, the US Federal Reserve began a rate hike cycle, global economic growth slowed, and geopolitical risks intensified. At the same time, US stock valuations soared to historical highs. By the end of Q1 2016, the S&P 500 PE (TTM) ratio rose to 22.4 times, approaching one standard deviation above the mean since 1990. Buffett continued to reduce positions from Q2 2016 to Q2 2017, with the cash ratio rising to 16%. In 2018, the US stock market saw a minor decline of 6%, with significant volatility throughout the year. During this period, Buffett accumulated more chips, made minor additions to positions, and slightly reduced the cash ratio to 14%. The US stock market continued to rally in 2019. 5. Adding positions during extreme events: Q3 2011, Q1-Q2 2022 Looking back at historical data, when extreme events triggered rapid stock market declines, Buffett decisively added positions, such as during the European debt crisis in 2011 and the Russia-Ukraine conflict in 2022. After the European debt crisis led to a sharp market decline in Q3 2011, Buffett significantly increased positions. Post-crisis, his positions returned to pre-crisis levels. In July 2011, after the announcement of a new round of bailout plans for Greece, concerns over the European debt crisis escalated, causing global stock markets to plunge. The S&P 500 plummeted over 15% in two months. In Q3 2011, Berkshire Hathaway significantly added $10.4 billion in positions, reducing its cash ratio from 13% in Q2 2011 to 9% in Q3 2011. Following this, with the reversal of operations by the Federal Reserve in September and assistance from the European Central Bank's LTRO program in October, the S&P 500 began to recover from its October low, reaching a cumulative gain of 29% by mid-2012. In Q3 2012, Buffett began to reduce the positions added during the crisis, bringing the cash ratio back to 11%. When the Russia-Ukraine conflict broke out in early 2022 and the stock market experienced a major decline, Buffett added significant positions. After the market stabilized, positions returned to their pre-decline levels. On February 24, 2022, the Russia-Ukraine conflict erupted, spreading market panic. Coupled with the Federal Reserve's rate hike cycle starting in March, the S&P 500 index fell by over 20% in six months. During this period, Berkshire Hathaway continued to increase its stock holdings, with a cumulative actual increase of $58.5 billion in the first half of 2022. The cash ratio decreased from 15% in Q4 2021 to 11% in Q2 2022. As the market gradually recovered in Q4 2022, with the S&P 500 reaching a maximum increase of 18% from its low point, Berkshire Hathaway began to reduce positions, gradually bringing the cash ratio back to around 15% by the end of 2023. These observations illustrate Buffett's strategy of seizing opportunities during market downturns to add positions, and his subsequent reduction of positions after market panic subsides and resumes an upward trajectory, akin to "scalping," capitalizing on every crisis situation. 6. Worth noting: Reducing positions from Q1 2024 to Q3 2025 Since 2024, Buffett has been steadily reducing positions, with the current cash ratio reaching a historical high of 31%. Since 2022, there have been significant changes in Berkshire Hathaway's holdings: cash positions have steadily increased, and stock positions have decreased simultaneously. As mentioned earlier, following the market rapid decline caused by the Russia-Ukraine conflict in Q1 2022, Buffett significantly increased positions, lowering the cash ratio to around 11%, the lowest point in that period. Subsequently, starting from Q2 2022, the cash ratio gradually increased, initially resembling a normal recovery from a low position. From Q2 2022 to Q4 2023, the book cash ratio increased from 11% to around 16%. By 2024, the pace of increase in the cash ratio accelerated significantly, rising from 16% to 31% by Q3 2025, accompanied by a more substantial reduction in stock holdings, with cumulative reductions of $177.4 billion in the last seven quarters, signaling a more explicit defensive strategy. The reduction in positions reflects Buffett's concerns about the overvaluation of the US stock market. The analysis indicates that Buffett has demonstrated outstanding timing effects during past bull and bear cycles, which is essentially a result of practicing the strategy of "be greedy when others are fearful, and be fearful when others are greedy." Berkshire Hathaway's continuous increase in cash positions in this round resembles a forward-looking risk management approach based on historical experience. Behind this, there may be an implicit cautious stance on the overall high valuation of the current US stock market. As of December 19, 2025, the S&P 500 PE ratio stands at 29.1 times, close to the 94th percentile since 1990, nearing levels seen during the dot-com bubble in 2000. The Nasdaq PE ratio is at 41.4 times, in the 81st percentile since 2003, although not yet reaching its peak in 2000, but still in the historical high range. In addition to valuations, comparing with history, this current bull market in the US has been going on for a considerable length of time. Since the Dow Jones was established in 1896, the US stock market has gone through six complete bull and bear cycles, with individual bull markets lasting from 5 to 24 years, averaging around 12 years. The current bull market started in March 2009, lasting nearly 17 years, surpassing the historical average and approaching the duration of the bull market from 1982 to 2000.