Warren Buffett’s recent decisions to reduce Berkshire Hathaway’s shares in Apple and Bank of America have ignited discussions regarding their implications for the market and the broader economy. Nevertheless, the conclusion is likely to be more nuanced than alarming. In recent times, Buffett has expressed that he doesn’t find a surplus of appealing value in the public markets.
His hesitation to make a significant acquisition of an entire company for some time, even as he actively seeks ways to convert cash into significant stakes in lasting enterprises, highlights a noticeable scarcity of opportunities that align with his size and valuation criteria. Over the last seven quarters, Berkshire has been a net seller of stocks from its investment holdings, a duration during which the S&P 500 has gained 50%. Long-time Berkshire investor Ed Borgato comments that the reductions in Apple and Bank of America “do not suggest a broader macro perspective of any sort.
Such an interpretation would entirely contradict his logical approach and historical decision-making.”
The divestiture of shares in Apple and Bank of America likely reflects the sheer size those investments had reached, with Apple constituting nearly 50% of the investment book by late last year. Borgato identifies it as an “inconvenient reality that Apple has ballooned to a significant segment of the portfolio while carrying a high valuation against a slower growth trajectory.”
Regarding Bank of America, it has proven to be an immensely profitable venture, strategically entered shortly after the global financial meltdown, and it makes sense to reduce Berkshire’s stake to under the 10% threshold, above which shareholders must disclose transactions promptly. During the annual shareholder gathering in May, Buffett announced that his designated successor as CEO – current vice chairman Greg Abel, who transitioned from a utility role and oversees the non-insurance aspects – will ultimately have authority over investment decisions.
This marked a change in his perspective from when he originally believed that the functions would be separated.
Buffett recalibrates investments amidst market overpricing
A reasonable conclusion can be drawn that the future activities of Berkshire Hathaway, especially in terms of entering and exiting minority stakes in public equities, may become a less vital focus without Buffett – the youthful stock speculator and value-investing scholar who initially built his empire as an activist equity stakeholder.
The profit-taking by Berkshire in substantial positions occurs as its own shares have significantly outperformed and appear increasingly richly priced. Since the bear market low of October 2022, Berkshire has closely tracked the iShares MSCI Quality ETF (QUAL), while exceeding the performance of the S&P 500, showcasing how capital has consistently flowed to dominant firms with strong balance sheets and steady profitability. This quality sector of the market – consisting of numerous cash-flush, high-margin tech firms alongside other high-return entities – has been beneficial for investors amid uneven profitability growth and rising interest rates since 2022.
However, this market tier is currently trading at the upper limits of its historical valuation spectrum, exceeding a 10% premium over the S&P 500, while profit expansion is becoming more widespread and the Fed is reducing rates amid a potentially softer landing. Concurrently, Berkshire’s price-to-book-value ratio has surpassed 1.6, a level it has only experienced for a few months within the last 15 years. The company has significantly cut back on share repurchases in the latest quarter, with Buffett recognized for being particularly selective regarding the price he agrees to pay for repurchasing Berkshire shares.
The nearly $300 billion in cash reserves held by Berkshire serves simultaneously as a safety net and a constraint. Buffett has voiced his intent to secure returns close to 5% while acting as a stabilizing force during economic fluctuations. While Buffett’s recent actions may provoke inquiries and speculation, it is vital to consider the extensive context and long-term strategies behind the legendary investor’s approach.
