Warren Buffett Just Sold $75 Billion Worth of Stock

Did you see the news? I'll send you the link. Oh wow, he sold a lot of stock! Warren Buffett, the best investor that has ever lived, is currently selling massive chunks of his portfolio. Berkshire Hathaway released their quarterly earnings report just a few days ago, and if you browse through the balance sheet, you can see something is definitely going on.

If we zoom in and have a look at their stock and bond holdings coming into the quarter on the 31st of March 2024, Berkshire had $153.4 billion sitting in short-term U.S. government bonds and had a stock portfolio worth $335.8 billion. Just looking at those two lines, Buffett was in 31% government bonds and 69% stocks. But now take a look at Berkshire's posted results just three months later, on the 30th of June 2024. Berkshire held a whopping $234.66 billion, more than $3 billion prior! Where did this money come from? It came almost entirely from their investments in stocks.

On June the 30th, Berkshire had reduced their stock holdings from $335.8 billion to $284.5 billion. This means in one quarter he sold at least $51 billion worth of shares out of the Berkshire portfolio. In fact, once you account for the $23.9 billion worth of reported stock gains in the second quarter, it actually means he sold around $75.5 billion of securities in one quarter alone. So the question is, what did he sell and why?

As some of you keen followers might have already guessed, the biggest change to the portfolio came from him selling just one stock, and that stock was Apple. As you can see from further down in the report, last quarter, Berkshire held $135.4 billion worth of Apple stock, and now that number sits at just $84.2 billion—a reduction of $51.2 billion. This takes Apple from a whopping 50% of the Berkshire portfolio two quarters ago to roughly 30% now, which is still his largest position. In fact, it’s roughly double the size of the next largest stake, which is Bank of America at $41.1 billion.

But this sale certainly changes the look of the Berkshire portfolio moving forward. Yeah, it's pretty crazy he kept selling in Q2. Um, surely that's got to be his biggest selling ever! So that's really the headline of this story. But of course, we did see Berkshire reduce the Apple position by 13% in Q1, so we did know he was selling Apple, but I don't think anyone anticipated it would continue to quite this extent. At least $50 billion in one quarter? That's really something!

So now the question is, well, why is he selling? And this is where things start getting really interesting. You guys might remember when I was over in Omaha covering the Berkshire Hathaway meeting. I made a video on exactly that because listening to him live, I remember he actually took a good amount of time in the meeting itself explaining his decision to start selling. Coincidentally, that entire America trip was made possible by Morning Brew, and they've been super generous to agree to sponsor this Berkshire update as well.

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So if you're interested, sign up to Morning Brew today by clicking the link in the description or the pinned comment. But with that said, let's dive into exactly why Buffett has decided to unload a heap of Apple shares. What's interesting about this story is that Buffett's reasoning is really unexpected and tells you a lot about where he thinks both the stock market and the economy are headed.

One thing that may surprise you: We don’t mind paying taxes at Berkshire. We are paying a 21% federal rate. Let the gains take in, uh, 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 business we make. They don't own the assets, but they own a percentage of the earnings. They can change that percentage any year. The percentage that they've decreed currently is 21%. 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. They may decide that someday they don’t want the fiscal deficit to be this large because that has some important consequences. 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 the America is 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 that we sold a little Apple this year.

Now, there's a lot to unpack from this explanation from Buffett, but the main reason he's locking in profits from his Apple position is because of what he thinks the future will look like from a fiscal perspective. This tells us two pieces of information: one, Warren Buffett's thoughts on the future of the United States, and two, Buffett's thoughts on the future of Apple stock.

Let's start with the future of America. From that clip, this is Warren essentially saying that he sees the U.S. in a major deficit, one that's only predicted to worsen over time. He sees the U.S. debt pile swelling and the interest expense growing rapidly. His take is that when something gives—which is inevitable—then it'll be taxes that get raised on individuals and corporations.

And he's got a point. Currently, the corporate tax rate is 21%. That's the lowest that's been since the 1930s. It's been as high as 52%, but it's trended down over recent history to the 21% level that the Tax Cuts and Jobs Act dropped it to in 2017. If you look at how much revenue is collected by the U.S. from corporate taxes, it's a tiny piece of the pie. So if the U.S. really does get serious about reducing the size of that deficit, you can imagine a fairly easy decision in that process will be raising the tax rate.

So Buffett says he's happy locking in a large portion of the Apple profits Berkshire is sitting on so he can pay 21% on those gains instead of something much higher later down the track. But that also gives us insight into what Buffett is expecting in terms of returns over the next few years. Imagine, say, the corporate tax rate gets hiked at some point in the next five years by 15%. Now, if that was to be the case, Buffett is essentially saying that he does not back Apple stock to be able to outpace the rate at which the corporate tax rate will be hiked.

In fact, he'd prefer to sell cash in $50-plus billion of profit and park that in U.S. Treasuries at around 5% as opposed to continuing to hold this stock for the ultra-long term. This is a very unusual line of thinking from Buffett because it immediately makes you think that he believes Apple's business might have lost its long-term growing power. Right? The business might have maxed out. But then again, in the same meeting, he also says this: "Have you or your investment manager's views of the economics of Apple's business or its attractiveness as an investment changed since Berkshire first invested in 2016?"

No, but we have sold shares. We look at common stocks or marketable equities or the things that people love to look at as being businesses. When we own a Dairy Queen or we own whatever it may be, we look at that as a business. When we own Coca-Cola or American Express or Apple, we look at that as a business. We have no way, no attempt made to predict markets; we have an attempt made to pick stocks. We own Apple, which is an even better business, and we will own, unless something really extraordinary happens, we will own Apple and American Express and Coca-Cola when Greg takes over this place.

So this is where things get odd. Buffett is selling massive chunks of Apple stock, but at the same time he says that his views about Apple’s business haven’t changed. In my view, this can only mean one thing: his decision to sell is not a reflection of the quality of Apple's business, but rather a reflection of the valuation of that wonderful business.

You can see that even just by looking at the PE ratio of the stock. When Buffett first bought into Apple, around 2016, Apple had a PE ratio of around 12. This means Apple shareholders were willing to pay 12 times the company's earnings as a stock price. Now, what's been really interesting is that over time, despite Apple's earnings rising as the business becomes more and more profitable, the stock price has risen far in excess of the rise in profits.

This is a phenomenon known as multiple expansion, where investors make returns in the stock because over time people are just willing to pay increasing amounts for the shares above and beyond earnings growth. As you can see in the case of Apple, the PE ratio has ballooned from 12 back in 2016 to 34 today. Effectively, investors are now willing to pay almost three times as much for the same level of earnings. Interestingly, this was hinted at by Buffett during the meeting. He said he's seeing a very pricey stock market at the moment, and combined with the various economic challenges in the world right now, he actually doesn’t mind locking in those Apple profits at a low tax rate and putting that money into cash.

Have a listen: "But I don't mind at all under current conditions building the cash position. I think when I look at the alternative of what’s available in the equity markets and I look at the composition of what's going on in the world, we find it quite attractive." He said that he did this because he didn't mind building up the cash horde at this point because of the environment that's taking place.

I guess the economic environment, the stock outlook... I mean, I tried to pull a little more out of him later with another question, and he didn't bite on it, but what are you going to do with all that cash? Why do you need all that cash? He says he can't find good places to put it, and that makes you wonder if he thinks the entire market's overvalued and built up that cash pile.

He did, as Bloomberg notes, Warren Buffett's cash pile is now at a record $276.50 billion. I should say for those that don't know, when big companies talk about building up their cash pile, a lot of times you will look and see that their cash and cash equivalents don't get any bigger. That's because in most instances, any significant amount of cash kept on the sidelines above and beyond what the company needs in their normal operations will usually be kept in U.S. Treasuries.

So when we look to Berkshire's quarterly filing, you can see that once you add the cash and cash equivalents from the insurance side and the railroad and energy side, as well as the short-term investments in U.S. Treasury bills, you get the grand total of $276.50 billion.

Got a European land war in Ukraine, there are rising tensions between China and the United States, and then on home soil, there's inflation, which still hasn’t been fully dealt with. Interest rates are at the highest level they've been since the turn of the century. Unemployment is now rising with lackluster jobs data released the other day. At the same time, the U.S. deficit is getting worse, meaning the debt pile is snowballing, and markets are defying macroeconomic logic, rising to new all-time highs on a technology that is generating next to no revenues for any company besides Nvidia.

And I think Buffett is simply looking at that situation and saying, you know what, it’s probably not the worst idea to have a big cash buffer at this time, especially at a time where holding cash isn't quite as punishing. The one-month U.S. Treasury yield is currently at 5.35%, which certainly isn't as punishing as a few years ago when Treasuries were yielding effectively zero. Cash is no longer trash.

So that's the lowdown on Buffett's huge reduction in Apple stock. As always, I do want to remind you that if you want to learn the Buffett Style in a step-by-step manner, including the four-pillar method, if you want to be guided through reading financial statements, understanding what you need to know, and learning how to find intrinsic value through three different valuation methods, definitely check out the introduction to stock analysis over on New Money Education. That is linked in the description. You can also sign up today with the code SAVE50, and you'll save $50.

But with that said, guys, thanks very much for watching, and I'll see you guys in the next one!

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