Buffett's market prediction without prediction

My friend shared with me the following interesting "Buffet's market prediction". 

Buffet's company, Berkshire is holding a record cash hoard of $189 billion. They admit they can't find anything to buy with this big amount. 

At the annual Berkshire shareholder meeting last Saturday in Omaha, 93-year-old Buffett said he didn't think anybody at Berkshire had "any idea of how to use it effectively, and therefore we don't use it. We only swing at pitches we like. Today things aren't attractive."

Buffet is notorious for not making marketing prediction but he would actually predict with precision the market direction without specifically saying it.  Two notable examples come to mind: his 1986 and 1999 shareholder letters.

 

In his 1986 letter, published February 27, 1987, Buffett wrote:

We currently find no equities that come close to meeting our tests. This statement in no way translates into a stock market prediction...

Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

As this is written, little fear is visible in Wall Street. Instead, euphoria prevails – and why not? What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. Unfortunately, however, stocks can't outperform businesses indefinitely.

Less than eight months later, on October 19, 1987, the Dow Jones Industrial Average suffered what is still the biggest one-day loss in its history: a 22.6% drop. It took 23 months to eclipse its pre-crash highs.

In his 1999 shareholder letter, published March 1, 2000, as the dot-com bubble was beginning to fall apart, Buffett said:

Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That's why we haven't added to our present holdings...

Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But... equity investors currently seem wildly optimistic in their expectations about future returns...

If investor expectations become more realistic – and they almost certainly will – the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated.

The Nasdaq Composite Index had peaked on March 10, 2000 and was down nearly 22% when Buffett published his letter. It would eventually fall by a total of 78% by the time it hit bottom on October 9, 2002.

Buffett could publish either excerpt today and be spot on. All the ingredients are here: Stocks are too expensive, investors are euphoric, and Buffett isn't buying. The S&P 500 Index and Nasdaq are both making new all-time highs.

Take another look at Buffett's messaging... "The market adjustment is apt to be severe" for the last three years. He didn't predict a stock market decline, but he pointed out that equities starting from ultra-high valuations tend to be poor. And when such valuations are accompanied by ultra-optimistic investor expectations, they tend to end with a "market adjustment" that is "apt to be severe."