Warren Buffett’s recent moves to trim Berkshire Hathaway’s holdings in Apple and Bank of America have raised questions about what it means for the market and economy. However, it’s unlikely that the takeaway is simple or scary. Buffett has indicated in recent years that he doesn’t see an abundance of compelling value in the public markets.
The fact that he hasn’t made a hefty purchase of an entire company in a while, even as he seeks out ways to turn cash into ownership of enduring enterprises, underscores the apparent lack of opportunities of the required size and valuation. Berkshire has been a net seller of equities from its investment portfolio in each of the past seven quarters – a period in which the S&P 500 appreciated by 50%. Private investor and longtime Berkshire shareholder Ed Borgato says the Apple and Bank of America “trimming does not reflect a macro view of any kind.
That would be entirely inconsistent with his sensibility and decision-making history.”
What the sell-down in Apple and BofA probably reflects, most directly, is how large those positions became, with Apple late last year amounting to about half of the investment book. Borgato calls it an “inconvenient fact that Apple has grown to be an enormous portion of the portfolio and carries a premium valuation against a much slower growth rate.”
As for Bank of America, it’s been a wildly profitable investment entered in opportunistic fashion shortly after the global financial crisis, and there is probably some rational objective at least to pare Berkshire’s stake to below the 10% threshold, above which holders need to report transactions almost immediately. At the annual shareholder meeting in May, Buffett revealed that his chosen successor as CEO – current vice chairman Greg Abel, who came up as a utility executive and runs the non-insurance businesses – will also have final say over the investment side.
This represented a shift in his thinking from a time when he thought the roles would be split.
Buffett adjusts holdings amid market overvaluation
One fair inference from this is that moving capital into and out of minority stakes in public equities is likely to be a less significant pursuit of the future Berkshire Hathaway without Buffett – the childhood stock speculator and student of value investing who came to assemble his empire initially as an activist equity investor.
Berkshire’s profit-taking in big positions has occurred at a time when Berkshire’s own shares have handily outperformed and have begun to look richly valued. Berkshire since the bear-market low of October 2022 has almost perfectly tracked the iShares MSCI Quality ETF (QUAL), while outpacing the S&P 500, a reflection on how money has flowed steadily into dominant companies with stellar balance sheets and stable profitability. The quality segment of the market – with plenty of representation among cash-rich, high-margin tech companies along with other high-return businesses – has served investors well over a period of uneven earnings growth and higher interest rates since 2022.
Yet this market tier now trades at the high end of its historical valuation range, above a 10% premium to the S&P 500, at a time when profit growth is broadening and the Fed is cutting rates into a soft-looking landing. In the process, Berkshire’s price-to-book-value ratio has climbed above 1.6, a level above which it has only spent a few months over the past 15 years. The company slowed the repurchase of its own shares to a trickle in the latest quarter, with Buffett known to be notoriously picky about what he pays to buy back Berkshire equity.
The near $300 billion in cash held by Berkshire is both a buffer and a burden. Buffett has spoken of his willingness to collect close to 5%, and to act as a stabilizer during economic turbulence. While Buffett’s recent moves may raise questions and trigger speculation, it’s crucial to consider the broader context and long-term strategies that the legendary investor operates under.
