Warren Buffett’s recent trimming of stock positions in Apple and Bank of America has raised questions about what it means for the current market and economy. Bill Smead, a top fund manager, sees parallels between Buffett’s actions now and his warnings before the dot-com crash in 1999. Smead has used Buffett’s long-term buy-and-hold strategy to great success, outperforming 99% of similar funds over the last 15 years.
However, he also takes note when Buffett is preparing for downside risk. In 1999, Buffett warned that stocks had performed well due to falling interest rates and rising corporate profits, but this trend was unlikely to continue as valuations had climbed to extremes. The S&P 500 then plummeted by 50% over the next few years.
Smead worries that the current winning streak of low interest rates and growing corporate profits can’t go on forever. He estimates there’s a slim chance that investors will meet their future financial needs through S&P 500 investments over the next 10 to 15 years. Smead’s outlook includes a contrarian view that inflation is set to surge again as the Federal Reserve cuts interest rates.
Buffett’s portfolio adjustments analyzed
He believes another inflation flare-up could drive 10-year Treasury rates up toward 6%. With valuations at all-time highs by many measures, this scenario could spell trouble for the market.
Considering these factors—a resurgence in inflation, high valuations, and unsustainable corporate growth rates—Smead is betting on poor index performance ahead. He believes Buffett is too, based on his recent behavior of trimming positions. However, Buffett’s selling may also reflect the enormous size these positions had grown to within Berkshire’s portfolio.
Apple composed about half of the investment book late last year, and such large positions could lead to inherent risks. The moves may also be part of preparations for future management under Buffett’s designated successor, Greg Abel. For individual investors, these actions by Berkshire offer learning opportunities: how to manage significantly appreciated assets, the value of cash holdings amid falling rates, and the potential impact of higher tax rates on investment strategies.
While Buffett’s selling of equities could imply a cautious stance in the face of overvalued markets, it is likely more reflective of prudent portfolio management and regulatory considerations. Investors can take these insights to heart when making their own investment decisions in the current turbulent market conditions.
