Warren Buffett Just Sold $100 Billion Worth of Stock.

Uh, this question is from Johan Halen, who writes, "You're sitting on $168 billion of cash, which you told us today is now more than $182 billion." His questions are: one, what is Buffett waiting for? And two, why not at least deploy some of it?

Well, I think that's pretty easy to answer. Warren Buffett sold the staggering $97 billion worth of stock through the first 6 months of 2024. Yes, you heard that right! As the US stock market has continued to climb to uncomfortably high levels, Buffett has been dumping shares to the tune of nearly $100 billion. You need to be paying attention to this, or else you could lose a lot of money.

If you ask Warren Buffett, he'll be the first to say that it's foolish to attempt to time the stock market. However, Buffett's actions tell quite a different story. Take a look at this chart. The gray bars are Berkshire's cash position at the end of each quarter. The orange line represents the value of the S&P 500, the most frequently used US stock market index. As we can see here, despite what he may say in public, Buffett has quite the track record of building large piles of cash ahead of a stock market crash.

In the buildup to the Doom crash of the early 2000s, Buffett grew Berkshire's cash pile by a factor of 10. Buffett then took advantage of the bubble bursting and spent down his cash by buying up stocks for cheap. There is also the Great Financial Crisis. You can see that as the stock market continued to climb, so did Buffett's cash pile. The stock market went on to decline by a staggering 50% from its peak. What did Buffett do? You guessed it. He used the cash he was sitting on to make some of the biggest and most successful investments of his career.

The cash pile that Buffett has built now makes these prior examples look tiny by comparison. As the US stock market has soared, so has the amount of cash Buffett is holding, raising alarm bells that Buffett thinks the US stock market is in a massive bubble. Buffett's cash pile has now grown to a staggering $276 billion. As you can see here, this cash pile has nearly tripled in just the past 2 years, growing from $100 billion in the summer of 2022 to nearly $300 billion as of the making of this video.

Buffett's rapidly increasing cash position has followers of Buffett very nervous. You see, in the past, when cash increased at Berkshire, it was slow and steady over a period of many years. Berkshire Hathaway is a holding company that owns dozens and dozens of different businesses. These businesses generate cash in the form of profits from their operations. In the past, Buffett would slow down his pace of making investments, and cash would naturally pile up.

But oh boy, is this time different! I have studied Buffett's entire career, and I have not been able to find another time where Buffett sold such a large portion of stocks in such a small time frame. What's even more alarming is the fact that Buffett is selling stocks and companies that he previously said he planned to hold forever. This includes Buffett selling a staggering roughly $90 billion worth of Apple stock in the first 6 months of 2024 alone.

It wasn't too long ago when Buffett considered Apple to be one of the stocks he would likely never sell. In Buffett's 2020 annual letter, he called the stake in Apple one of Berkshire's family jewel assets. According to a simple Google search, the term "family jewels" refers to valuable items belonging to a particular family and handed down from one generation to the next. By Buffett calling the Apple stake a family jewel of Berkshire, he was essentially implying that this was a position Buffett planned to hold for the rest of his life, in essence signaling that he was planning on passing down the stake in Apple to the next generation of leaders at Berkshire Hathaway.

This praise for Apple was not just a one-time thing. In Buffett's 2021 annual letter, Buffett referred to Apple as part of Berkshire Hathaway's so-called big four—the four largest and most important holdings to the future success of Berkshire. The big four consisted of Berkshire's massive insurance operation, Apple, the railroad BNSF, and the utility company Berkshire Hathaway Energy. Notably, Apple is the only stock position to make this list. The insurance operations, BNSF, and Berkshire Hathaway Energy are all fully owned subsidiaries.

As a quick aside, a big part of the research for this video involved going through Buffett's famous annual letters to see what he had to say about Apple. Buffett's letters are considered a must-read for those who want to learn about business and investing. As a thank you for watching this video, I have compiled 43 years' worth of Buffett's letters that you can download completely for free at the link in the description of this video. Make sure to check them out because they were super helpful for me, and I'm sure they'll be just as useful for you.

With that out of the way, let's get back to the video. Buffett's past praise for Apple was a large reason why it was so shocking when he began to rapidly sell down the Apple stake. Here’s what he had to say when asked why he has been selling shares of Apple: "One thing that may surprise you, we don't mind paying taxes at Berkshire. We are paying a 21% federal rate on the gains we're taking in Apple, and that rate was 35% not that long ago, and it's been 52% in the past. The federal government owns a part of the earnings of the businesses we make. They don't own the assets, but they own a percentage of the earnings, and they can change that percentage any year.

The percentage that they've decreed currently is 21%, and I would say with the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely. The government wants to take a greater share of your income or mine or Berkshire's they can do it. And they may decide that someday they don't want the fiscal deficit to be this large because that has some important consequences, and they may not want to decrease spending a lot, and they may decide they'll take a larger percentage of what we earn and we'll pay it. I would really hope with all of America's done for all of you. Shouldn't bother you that we do it. If I'm doing it at 21% this year and we're doing it at a higher percentage later on, I don't think you'll actually mind the fact."

But we sold a little Apple this year. As you just saw, Buffett was quick to say that his decision to sell a large portion of his position in Apple was tax related. However, this simply doesn't tell the entire story. The true reason why Buffett has been selling billions of stock lately is more concerning. You'll see what I mean in a second. But first, let me explain Buffett's point on taxes.

Buffett spent approximately $31 billion acquiring shares in Apple. The majority of these shares were purchased between 2016 and 2018 when Apple stock was trading well below current levels. At the end of 2023, the value of the stake has swelled to a staggering $174 billion. This means that Buffett was sitting on a roughly $143 billion unrealized gain—money that he would have to pay taxes on whenever he did eventually sell.

Whatever the tax rate is at the time the stock is sold will greatly impact how much money Buffett and Berkshire will get to keep after paying the tax bill. The US corporate tax rate is currently sitting at 21%, down from 35% as recently as 2017, and the lowest corporate tax rate in the post-World War II period. With a 21% tax rate, Berkshire Hathaway would pay about $30 billion in federal taxes on a $143 billion gain. However, if that rate would increase back to 35%, that tax bill would jump to a whopping $50 billion—a full $20 billion more dollars going to taxes.

Buffett makes the case that, given the current financial challenges the US government is facing, elected officials will eventually have no choice but to significantly raise taxes on corporations. As we can see here, the US federal debt to GDP is at its highest level ever—higher than even when the US borrowed heavily and drastically downsized the civilian economy during World War II. In fact, the US is in so much debt that just the annual interest payments to stay current on this debt have officially surpassed what the country spends each year in both defense and Medicare for the first time ever.

With this background, Buffett's argument about selling stocks ahead of higher potential taxes in the future seems to make sense on the surface. However, this does not tell the whole story. The higher taxes argument is just a cover story. If we read in between the lines, we can see the true reasons as to why Buffett is selling are far more worrisome than just higher potential taxes.

Now, this isn't even coming from me. Here is Buffett, in his own words. In 2011, Buffett wrote an opinion piece in the New York Times titled "Stop Coddling the Rich." In this article, he argued that the US government should significantly increase tax rates on investment returns. Here's what he had to say: "Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends. I didn't refuse, nor did others. I have worked with investors for 60 years, and I have yet to see anyone—even when capital gains rates were 39.9% in 1976 to 77—shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off."

Here, Buffett is making it abundantly clear that higher taxes have never factored into his investment decisions. In fact, you can find countless examples just like this one of Buffett striking a similar tone. So, after building a legendary career, not factoring in tax rates into his investment process, why is Buffett suddenly selling $100 billion worth of stocks over tax concerns? As you're about to see, the answer is worrisome.

It's no secret that Warren Buffett is the most closely followed investor on the planet. He's one of only a handful of people with the power to move the stock market with just his words. When he explained why he had been selling Apple stock, Buffett was speaking to a crowd of 40,000 people at the famous Berkshire Hathaway annual meeting. In that crowd was none other than Tim Cook, the CEO of Apple. The comment Buffett would make at this venue eventually went on to be broadcasted to millions of people across the world. Imagine the uproar and ripple effects if Buffett would have told his legion of loyal followers that he was selling Apple because it was overvalued.

Buffett obviously knows his every word is closely scrutinized. Therefore, saying he was selling for tax reasons was a way to answer the question of why he was selling Apple stock without raising alarm bells. However, the real reason as to why Buffett has been selling tens of billions of dollars' worth of stock should be obvious to longtime Buffett followers.

Take a look at this chart of Apple's price-to-earnings ratio over time. When Buffett bought the vast majority of his stake in Apple, the stock was trading at a PE ratio of between 10 and 15. At the time, the majority of investors viewed Apple as an undifferentiated tech hardware company at risk of rapidly losing market share if a better competing product was introduced. To put it simply, Apple stock was unloved by investors.

Now, the company has universally become recognized as one of the best companies in the world. As a result, Apple's PE ratio has increased from 10 times when Buffett started buying it to over 30 times now, causing many value investors to worry that Apple is significantly overvalued. At the end of 2023, Berkshire's entire market cap was $800 billion. However, the value of the Apple stake had grown to a whopping $174 billion. This means that the Apple stake alone was a staggering 22% of the entire company. The potential overvaluation in Apple stock was simply too big for Buffett to ignore.

One factor that has caused this cash pile at Berkshire to grow significantly is Buffett selling large amounts of stock he previously owned. However, the other reason cash has accumulated is because Buffett has been eerily quiet when it comes to making new investments. Buffett is very clear as to why this is happening. Listen to what he had to say when asked why he has been sitting on the sidelines.

"Well, I think that's pretty easy to answer. I don't think anybody sitting at this table has any idea of how to use it effectively, and therefore we don't use it. It isn't like I've got a hunger strike or something like that going on. It's just that the things aren't attractive."

As Buffett just mentioned, the potential overvaluation in stocks spreads far beyond just Apple. One way to see how overvalued the stock market is right now is to look at what is referred to as the Buffett indicator. The Buffett indicator was coined by, yes, you guessed it, Warren Buffett. Buffett described the ratio as the best single measure of where valuations stand at any given moment. The Buffett indicator expresses the value of the US stock market in terms of the size of the US economy. If the stock market value is growing much faster than the actual economy, then it may be in a bubble.

Calculating the Buffett indicator is incredibly straightforward. Just simply take the total value of the US stock market, which, as of the making of this video, is $57.5 trillion. Next, you divide that number by the current size of the US economy as measured by gross domestic product. The annual GDP currently stands at $28.42 trillion. This leaves us with a reading of 202% from the Buffett indicator.

Now, is this a good or bad number for the Buffett indicator? Well, you are about to be in for quite the surprise when you see a chart of the Buffett indicator dating back to 1950. At 202%, the Buffett indicator is essentially at its highest level ever. The last time the Buffett indicator was this high was back in 2021, when historically low interest rates caused the stock market to be in a bubble. Those good times did not last for long, as the stock market had one of the worst years ever the following year in 2022. The S&P 500 went on to fall nearly 20%, and the NASDAQ fell by a staggering 33%.

Of course, only time will tell what the future holds, but this helps explain why Buffett is cautious and sitting on the sidelines. If you made it this far in the video, it's obvious you're serious about investing and want to learn how to make money investing in the stock market. Make sure to check out this video here because Warren Buffett provides the secret on how to generate high investment returns even with small sums of money. I will see you over there.