How to Play the Flattening Market

“The individual investor should act consistently as an investor and not as a speculator.”

–Ben Graham

June 5, 2025 — Market uncertainty remains high. That can be seen with the disconnect between professional investors and retail investors.

A survey of money managers from Barron’s indicated that 60% of money managers feel that the market is currently overvalued. And 32% of them are outright bearish, the highest level since 1997.

In the meantime, retail investors did what they’ve been trained to do over the past 15 years. They bought the dip:

Retail investors have been buyers at their fastest pace ever in March and April.

Retail investors bought $40 billion of stocks in April, topping their buys in March (which itself was the dip off the DeepSeek news). It’s the largest inflow ever.

So what happens when retail runs out of money to buy the dip? They better hope that institutional investors will want to be buyers. Of course, hope is not a strategy.

Looking at institutional investors, funds were big buyers when the S&P 500 dropped under 5,000 – a price point now more than 10% lower from where stocks currently trade.

Recent transactions off the major indices, in the so-called “dark pools,” suggest that we kick off May with stocks at a point where institutional investors who went in big near the market bottom are taking some profits here.

Of course, the stock market is notorious for its big booms and busts.

A better hint at how markets are faring may come from the credit markets, specifically private credit.

We’ve been keeping an eye on the private credit market since last year. It’s where investors can look for strong deals with fixed payouts – largely without having to move a market or disclose exact holdings to do so.

A report from Bloomberg in late April suggests that investors are heading for the exits in private credit deals. And the lack of a public market means a lack of liquidity to exit.

A few recent deals suggest that traders heading for the exit aren’t getting a full dollar back for their investments. At best, they’re getting back 90 cents on the dollar, about a 10% loss.

At worst? Signs point to a few deals where investors have been willing to exit at 50 cents on the dollar – a return worse than the stock market’s peak-to-trough move this year.

In short, institutions are heading for the exit, both in the Wild West stock market and in the usually calm, cool, collected fixed-income market. They may have played the April selloff and bounce higher well, but remain with at least one foot out the door.

Where does this imbalance of retail and institutional investors end up?

It’s most likely that stocks are range-bound for the year, and will likely retest their 2025 lows at some point, potentially in the fall.

For now, caution is the name of the game.

Joining in with retail investors now after the market’s move higher is reminiscent of Isaac Newton jumping back into the South Sea bubble after he had already made a fortune. By moving back in later, he lost it all.

Chasing investment returns, even after making a great profit, is a needless risk in any market.

“I can calculate the motions of heavenly bodies,” brooded Newton. “But not the madness of people.”

Why Quality Matters

In the meantime, Warren Buffett is cashing in his chips. After 55 years as CEO of Berkshire Hathaway (BRK-B), Buffett will step down at the end of the year.

He still remains a major shareholder with no intention to sell. But one can’t help but feel that it marks the end of an era.

Buffett is known for his cheerful demeanor and folky wisdom. It’s what gave him the moniker the Oracle of Omaha. It’s also that reputation that’s allowed him to make investments that wouldn’t be available to other investors.

After the financial crisis in 2008, Buffett was able to buy preferred stakes in Bank of America (BAC) and Goldman Sachs (GS). Those stakes paid 10% yields, a high prices in the era of zero percent interest rates. But that was the going rate for Buffett’s reputation.

It’s unlikely that any other CEO would have the capital and reputation to get such a sweetheart deal.

Over the past year, Berkshire shares have traded like a tech stock, up 35%. And that’s even as Buffett has been scaling back his stake in consumer tech giant Apple (AAPL), and gone to over 30% cash, with a total of nearly $350 billion out of a market cap of just over $1 trillion.

Buffett’s ability to compound wealth at nearly 20% annualized during his tenure at Berkshire showcases several investment ideas that have influenced our investment policy in the investment research that goes into the Grey Swan Investment Fraternity.

That includes ensuring that investors get a strong value for the stocks that they buy. And that the stock is, first and foremost, an ownership stake in a company, not just a piece of paper to buy on Monday with the goal of hitting a profit by Friday.

Of course, Buffett’s success has overlooked some opportunities as well. Buffett has famously been against gold as an investment. However, gold has outperformed the S&P 5oo since the year 2000 – a 25-year outperformance.

Gold has far outperformed the overall stock market over the past 25 years.

Buffett could have saved himself a lot of moves by simply buying gold. That includes poor moves like buying International Business Machines (IBM) in the early 2010s on the logic of its strong share buyback program.

The billions IBM spent buying back shares failed to move the value of the business higher – only earnings can do that, a factor Buffett realized when he dumped IBM for Apple.

Today, Apple is in the same boat as IBM a decade ago. A lack of new products, and the cash flows that come with them, combined with a high valuation and reliance on a massive share buyback, indicate that better returns are elsewhere.

In short, we salute Warren Buffett as one of the greatest investors of all time. His ability to generate market-beating returns consistently over a long lifespan indicate the power of long-term planning and patience.

In fact, that may be all that matters. Buffett earned over 90% of his current wealth after the age of 60.

We can learn from Buffett’s successes and his failures, as well as decades reflecting on investing as a business. Plus, Buffett made a company annual meeting the “Woodstock of Capitalism.” We can’t think of higher praise.

Andrew Packer
Grey Swan

P.S. from Addison: Andrew’s insights, released at the start of May for paid-up Fraternity members, are bearing fruit as the stock market has slowed down – and as positive news headlines, like a high-level trade talk between the U.S. and China – are no longer enough to push markets significantly higher.

Stay cautious, and use market pullbacks to buy shares of industry-leading companies with strong balance sheets.

Your thoughts? Please send them here: addison@greyswanfraternity.com