Warren Buffett Sells His Only Vanguard Index Fund and Buys a Dividend Stock Up 7,120% Since 2010

Warren Buffett over the last six decades transformed Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) from a small textile operation into a trillion-dollar company. Under his leadership, Berkshire shares have advanced more than 5,500,000%, crushing the 39,000% return in the S&P 500 (SNPINDEX: ^GSPC).

Consequently, Buffett has become a source of inspiration and guidance for many investors, and his company made a few interesting capital allocation decisions in the fourth quarter, as detailed below:

• Berkshire sold its entire position in the Vanguard S&P 500 ETF (NYSEMKT: VOO), the only Vanguard index fund in its portfolio.

• The company added to its stake in Domino's Pizza (NASDAQ: DPZ), a dividend-stock that has returned 7,120% since January 2010.

Here's what investors should know.

Warren Buffett not only sold the Vanguard S&P 500 ETF in the fourth quarter, but also sold the only other index fund Berkshire held its portfolio, which also happened to be an S&P 500 index fund.

Those funds track the S&P 500, which is widely seen as the best gauge for the overall U.S. stock market. So, Buffet's decision to sell could be interpreted as lost confidence in the U.S. economy and domestic stocks. But that seems unlikely. Buffett has warned investors not to bet against America, and has often recommended an S&P 500 index fund as the best way for most people to get exposure to stocks.

Buffett did not recant those beliefs in his latest shareholder letter, and I think he would have if his views had changed. So, if the decision to sell the S&P 500 index funds does not reflect lost confidence in the U.S stock market, then what was his motivation? I suspect the answer lies in the microscopic size of those positions.

The S&P 500 index funds accounted for less than 0.02% of Berkshire's portfolio in the third quarter, which means they were about as consequential as pocket change to the average person. Buffett may have sold the funds to consolidate that pocket change into a larger cash position in preparation for the next stock market correction.

To be clear, I am not arguing Buffett thinks the S&P 500 is cheap today. In fact, I suspect the opposite is true. The index has a price-to-earnings ratio of 26.1 times, a material premium to the 10-year average of 22.1 times. Instead, I am arguing Berkshire selling two S&P 500 index funds is not a subtle cue for individual investors to do the same.

The S&P 500 may suffer a steep correction in the near future. But the index is still likely to return about 10% annually over the next few decades, just as it has in the past.