Cash is King: Buffett's Heavy-Handed Stock Dumps Ahead of Market?

• News
• 2024-10-25

"The 'Oracle of Omaha' Warren Buffett has been quite active recently.

After continuously reducing his second-largest holding, Bank of America, Berkshire Hathaway's second-quarter report shows that his actions had already begun, with the largest stake in Apple being halved, the cash holdings of the 'Oracle of Omaha's' company have reached an astonishing $276.9 billion. Why would Buffett choose to cash out significantly, and what might he do next?

A Surge in Cash Reserves

The second quarter of 2024 marked the seventh consecutive quarter in which Berkshire Hathaway net sold U.S. stocks. As of June 30, Berkshire's cash reserves increased further from the record $189 billion three months prior to $276.9 billion.

What has garnered widespread attention is that Buffett sold approximately 390 million shares of Apple. As of June 30, Berkshire still holds about 400 million shares, valued at $84.2 billion. As a result, Apple's stock price plummeted by 4.8% on the 5th. Since its initial investment in 2015, Buffett has frequently praised the leadership and market dominance of this iPhone manufacturer. With the stake weight exceeding 50%, many investors have expressed concerns that Apple's proportion in Berkshire's investment portfolio is too large.

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When asked at this year's shareholder meeting why he started reducing Apple, Buffett said it was for tax reasons. He praised Cook as the 'best partner' after Jobs, and the iPhone might be the greatest product ever created. 'Unless there is a truly dramatic event that changes capital allocation, we will consider Apple as our largest investment. When (I) retire and Abel takes over, Berkshire will continue to own its current heavy-weight stocks, such as Apple, Coca-Cola, and American Express,' he said.

According to institutional calculations, the average purchase price of the shares Buffett sold in the first quarter was $39.62 per share, with the average price of Apple's stock being $182 during the same period, resulting in a paper profit of 359% for Buffett. The current corporate tax rate is a unified 21%, which means that out of the estimated profit of $142.38 per share, Berkshire will have to pay $29.90 to the U.S. government. Considering the issue of high U.S. debt, tax increases may become an important option for future governments, and the Biden administration has already proposed raising the corporate tax rate to 28%, which could be a reason for Buffett's decision to take profits.

Secondly, caution towards artificial intelligence (AI) may also be a reason for the reduction. In June this year, Apple officially launched its artificial intelligence system, Apple Intelligence, which is part of Apple's bold efforts to catch up with major tech competitors. Buffett has said he 'knows nothing' about it, 'Last year, I also mentioned that we have let the genie out of the bottle, especially when we previously invented nuclear weapons, and it is now doing some bad things. The power of this genie sometimes scares me, and it can no longer be put back into the bottle. I think AI might be similar; it has already been let out.'

Thirdly, Apple's forward price-to-earnings ratio is close to 30 times, higher than companies like Meta Platforms (23 times) and Alphabet (24 times), and compared to its competitors, Apple still needs to produce tangible products to prove the reasonableness of its valuation.

Hints of Selling Bank of America EmergeBefore Apple, the outside world had already noticed Berkshire Hathaway's recent actions of reducing its stake in Bank of America. Typically, Berkshire Hathaway discloses its changes in holdings in the 13-F filings released 45 days after the end of each quarter. However, when holding more than 10% of a company's shares and engaging in trades, immediate disclosure is required.

According to regulatory filings made public last week, Berkshire Hathaway sold approximately 19.2 million shares of Bank of America between July 30 and August 1. Since July 17, Berkshire Hathaway has sold 90.4 million shares of Bank of America over three weeks, with a total value of nearly $3.8 billion. The company remains the largest shareholder of Bank of America, with 942.4 million shares, accounting for about 12.1% of the outstanding shares, valued at approximately $37.2 billion.

As two major positions are reduced, the outside world believes it may be the "Oracle of Omaha" becoming increasingly wary of the overall U.S. economy or the high stock market valuations. Cathy Seifert, an analyst at investment bank CFRA Research, stated: "If you look at Berkshire Hathaway's overall situation and macroeconomic data, the conclusion is that Berkshire Hathaway is taking defensive measures."

The fragility of the economy makes valuations appear even more dangerous. The "Buffett Indicator" is calculated by dividing the total market capitalization by the Gross Domestic Product (GDP). In 2001, the "Oracle of Omaha" stated that this could be the best single indicator to measure valuation conditions at any given moment. In early July, the U.S. stock market's "Buffett Indicator" rose above 2, reaching the highest level since the beginning of 2022, when an adjustment triggered by the Federal Reserve's interest rate hikes followed.

Doug Kass, founder and president of hedge fund Seabreeze Partners Management, said this is a very strong warning signal. It has been quite reliable in the past, showing that stocks were extremely overvalued relative to U.S. economic output before the major sell-offs in 1987, 2000, and on the eve of the financial crisis. Kass further analyzed that when the indicator reaches two standard deviations above the long-term average, investors should start to pay attention, and this level was also reached in July.

It is worth mentioning that the "Buffett Indicator" is not the only one indicating that U.S. stocks are overvalued. Kass said that other popular valuation indicators, including forward price-to-earnings ratio, trailing price-to-earnings ratio, and price-to-sales ratio, are all above the historical 90th percentile.

Jim Shanahan, an analyst at investment company Edward Jones, after analyzing the buyback data from the previous quarter, stated: "Buffett seems to think that publicly traded stocks, including his own, do not have attractive opportunities. This worries me about his view of the market and the economy."

What happens next?

The Omaha Prophet has also expressed confidence in the future of the United States on multiple occasions, stating that he would not bet against America. Therefore, reducing holdings has become the main means of risk management for Berkshire Hathaway's portfolio. As of the second quarter of this year, the company has sold net for seven consecutive quarters, and the scale of the reduction in the last quarter exceeded the total of $56.09 billion during the period from October 1, 2022, to March 31, 2024.

Reporters have found that, in addition to Occidental Petroleum and Bank of America, changes in other positions can only be seen at the end of the quarter. This also means that the selling, including that of Apple, may still be ongoing.Looking at the scale of cash reserves since the beginning of this century, Berkshire Hathaway tends to raise a large amount of funds on the eve of interest rate cuts or crises. In 2008, Buffett loudly called for buying America, investing $5 billion to take a stake in Goldman Sachs to obtain preferred shares with a dividend rate of 10%, a deal that brought him a substantial return. In 2020, the "Stock God" successively established positions or increased holdings in many companies, mainly involving pharmaceutical, telecommunications, and oil stocks, also performing well.

Buffett once compared Wall Street to a "casino". Through value investment and buy-and-hold, the valuable experience the "Stock God" left to the world is that patience and foresight are far more important than trying to grasp short-term stock fluctuations. This time, facing uncertainties such as the election, geopolitics, and the Federal Reserve, he once again chose to wait and hold cash.

On August 30th of this year, the "Stock God" will turn 94 years old. Therefore, many market views believe that considering his advanced age, Buffett also hopes to leave more operational flexibility for his successor when he exits. Berkshire Hathaway can now obtain substantial cash returns by investing in short-term Treasury bonds, which makes the reason for cash reserves more sufficient.

So, how far away is the next big entry opportunity for Buffett and Berkshire Hathaway?