Warren Buffett’s Berkshire Hathaway is selling more shares in Apple and other companies and trimming Berkshire’s stock buybacks — ending September with $352.2 billion in cash, according to CNBC.
This raises many questions:
- Why is Berkshire raising so much cash?
- As stocks hit new record highs — with the S&P 500 up 20% so far in 2024 — should investors head for the hills or keep buying?
Buffett says he is selling because he thinks stocks are trading above their intrinsic value and capital gains taxes are likely to rise.
As for what investors should do, the answer depends on how much time you have left — if you think you will be around in five or more years, keep buying.
Berkshire Hathaway’s Third Quarter Portfolio Moves
Berkshire Hathaway is piling up cash. More specifically, between the second and third quarters of 2024, the company’s cash pile increased 17.4% to $325.2 billion, CNBC reported.
Overall, Berkshire sold $36.1 billion worth of stock in the quarter. Much of the proceeds came from unloading shares of its two biggest holdings: Apple and Bank of America. More specifically, Berkshire sold roughly 25% of its Apple holdings in the third quarter — marking the fourth quarter in a row, Buffett has dumped the iPhone maker’s stock.
Since the end of 2023, Berkshire has sold 605 million Apple shares — or about 70% of its holdings. The company unloaded 115 million in the first quarter and 390 million in the second quarter, I wrote in my August Forbes post.
In the third quarter, Buffett’s company dumped another 100 million Apple shares, according to the Wall Street Journal, leaving Berkshire with about $70 billion worth of the iPhone maker’s stock. Since the end of September, Apple stock has lost 4.3% of its value.
One investor, Chris Bloomstran, president and chief investment officer of Semper Augustus Investments Group which owns Berkshire stock, is not bullish on Apple. The iPhone-maker’s stock — trading at 30 times projected 12 months earnings — is overvalued given its expected slower growth, Bloomstran told the Journal.
Berkshire has also sold about $10 billion worth of Bank of America stock since the middle of July, noted CNBC. For the first time since 2018, Buffett’s company didn’t buy back any stock in the quarter, according to FactSet.
In recent months, the investor’s buybacks “have slowed to a trickle in recent months after many quarters of sizable repurchases,” the Journal reported.
Why Berkshire Hathaway Is Raising So Much Cash
Buffett has stated two reasons for raising so much cash: stocks are overpriced and capital gains taxes must rise.
For evidence of the first reason, one need look no further to the reason why Berkshire did not buy any of its stock in the third quarter — its price is too high.
How so? Buffett will only buy more of his company’s stock when he “believes that the repurchase price is below Berkshire’s intrinsic value, conservatively determined,” according to the company.
The idea that Buffett sees stocks in general as over-valued has been around for many months. In May, he told investors to expect him to sell shares and build up reserves because “he sees few cheap, high-quality companies in which to invest,” noted the Economist.
Another reason he is selling stocks is he anticipates higher capital gains taxes. Buffett wants to “realise his profits before that happens,” according to the Economist.
Buffett expects the U.S. government will tackle bigger fiscal deficits by raising taxes rather than by reducing spending. “I think higher taxes are likely,” he said on May 4 at Berkshire Hathaway’s annual shareholder meeting in Omaha, Reuters reported.
“They may decide that some day they don’t want the fiscal deficit to be this large because that has some important consequences. So they may not want to decrease spending and they may decide they’ll take a larger percentage of what we own, and we’ll pay it,” he said.
Although expressing concern that the fiscal deficit was larger than the $27 trillion Treasuries market, Buffett said U.S. debt would be “acceptable for a very long time because there’s not much alternative,” Reuters noted.
A Perspective On What Buffett’s Move Means For Investors
Buffett has famously said that for most people the best strategy is to make regular investments in a low-expense S&P 500 index fund.
I think such index investing makes sense — especially for people with longer time horizons. For people like Buffett, who is 94 years old, there may not be enough time to recoup losses in the market should they occur imminently.
If Buffett’s cash raising strategies signal a stock market drop is imminent, investors who follow that index investing strategy will be able to buy stock at lower prices every month until they bottom out.