Warren Buffett is offloading some of his biggest holdings amid broader market sell-offs.
One of the bigger storylines in financial headlines as of late revolves around some big moves made by Berkshire Hathaway CEO, Warren Buffett.
According to Berkshire’s latest quarterly earnings filing, the investment firm sold nearly half its stake in Apple (AAPL 1.72%). Considering Apple is Berkshire’s largest position by a wide margin, seeing such a significant sale of the stock warrants some attention.
On top of that, a series of recent Form 4 filings revealed that Berkshire also offloaded a good chunk of one of its favorite dividend stocks, Bank of America (BAC 0.76%).
While this level of portfolio allocation may seem surprising to some, the Oracle of Omaha may have been signaling to investors that these moves had been in the works for quite some time.
Let’s break down why Buffett may have engaged in this selling activity and explore how it fits into the bigger picture as it relates to the economy.
A trip down memory lane
One of the cornerstones of Buffett’s investing philosophy is to buy and hold quality investments over an ultralong time horizon. In fact, Buffett once proclaimed, “if you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
Buffett first bought a stake in Apple in 2016. Considering he has owned a position in the iPhone maker for less than a decade, his recent sale of Apple looks a bit curious at first glance.
However, investors should not be too quick to forget the past. According to Berkshire’s 13F filing from earlier this year, investors learned that Buffett also trimmed his Apple stake during the first quarter.
During Berkshire’s annual shareholder meeting in May, Buffett revealed his rationale for the Apple sale. Per usual, his reasoning was quite simple and not wrapped up in mystery whatsoever.
Namely, Buffett alluded that he thought changes to the U.S. tax code were on the horizon. Based on the current state of fiscal policy, Buffett put forth the notion that “something has to give” and that “higher taxes are quite likely.”
Simply put, Buffett was looking to take some profits off the table and avoid a heftier tax liability on his capital gains should his prediction come true.
While that same idea could be applied to his most recent sale of Apple stock, I think there are some other drivers influencing Buffett’s calculations.
Image source: The Motley Fool.
Wall Street doesn’t like uncertainty
A lot has changed since Buffett made his prediction about the tax code three months ago. The first layer of the unknown that I’ll unpack revolves around the dynamics of the upcoming presidential election.
According to predictive analytics website Polymarket, Vice President and current presidential nominee for the Democratic Party Kamala Harris holds a slight lead over Republican candidate Donald Trump.
The most recent model released by popular statistician and pollster Nate Silver suggests a similar line of thinking:
Today’s update. Harris is *still* gaining on Trump on our national polling average, now 3.1 points.https://t.co/vsGVG18HHI pic.twitter.com/rK9UtQr9fO
— Nate Silver (@NateSilver538) August 13, 2024
While I’m not here to predict the winner of the presidency, I do feel comfortable saying that the race’s outcome appears a bit too close to call at the moment.
The second layer of economic uncertainty that’s prevalent right now is interest rates. Economists all across Wall Street have been forecasting rate cuts from the Federal Reserve since the beginning of the year. But as of now, Fed Chairman Powell and his constituents have yet to implement a tapering strategy.
Why I think Buffett wins no matter what
Trying to identify the perfect moment to sell a stock is an exercise in false precision.
However, the possibility of rate cuts combined with differentiating policy decisions put forth by presidential nominees make quite the financial enigma. Considering these decisions can influence any given industry, it’s not entirely surprising to see “smart money” offload equities and hoard cash as these scenarios continue to play out.
Even though Buffett may be leaving some potential gains on the table in Apple and Bank of America stock, the acclaimed investor isn’t wasting his newfound capital.
According to Berkshire’s second-quarter filing, the firm held $237.6 billion in U.S. Treasury Bills on its balance sheet as of June 30. I see this as an extremely smart move by Buffett for a couple of reasons.
First, both the S&P 500 and Nasdaq Composite have returned roughly 14% so far in 2024. Considering that is almost double the long-run average return of the S&P 500 (when accounting for inflation) and includes a recent sell-off, I don’t blame Buffett for taking some gains in a volatile technology stock like Apple and reallocating the cash to a safer, more predictable asset in Treasury Bills.
Second, replacing some dividend income from both Apple and Bank of America with something more steady, such as U.S. Treasury Bills, isn’t a bad idea. While both companies have steadily raised their dividend over many years, it’s entirely possible that an economic slowdown could result in a sudden cut or halt to these payments. So, in a way, I think that Buffett is hedging this possibility by rolling over T-Bills and collecting a nice substitute for a dividend.
BAC Dividend data by YCharts
No matter what happens with the Fed, the election, the tax code, or the economy, Buffett has proven time and again that he knows how to make money in any situation. It’ll be interesting to see if he makes any further adjustments following any Fed decisions or the election outcome.
But for now, I think the Oracle’s decision to mitigate risk by holding onto cash and generating some passive income through Treasuries in lieu of new stocks will prove to be a wise one.
