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  • May 13, 2024 - Sign of a Market Top? Warren Buffett Sells his Biggest Holding

Sign of a Market Top? Warren Buffett Sells his Biggest Holding

May 13, 2024

Sign of a Market Top? Warren Buffett Sells his Biggest Holding

The news of Warren Buffett selling a big stake in Apple has created a buzz in global financial markets. And for good reason. The stock is Buffett's biggest holding.

Buffet is known as a buy and forget investor. He said many times that Apple is the best business in his portfolio. So why sell.

In this editorial, we will break down the ideas behind the sale and also examine if Buffett thinks the market is topping out.


First Things First

Warren Buffett sold 13% of his company, Berkshire Hathaway's stake in Apple worth about US$ 20 billion (bn).

Towards the end of 2023 he had sold a 1% stake in Apple but this time the sale was much bigger.

Apple was almost 50% of Berkshire's portfolio before the sale. The second holding, Bank of America, was just 12%. It's still the largest holding, about 40%, by some margin.

So, Buffett hasn't dumped the stock. In fact, at Berkshire's annual meeting, he said will own Apple forever unless something terrible happens and that it would remain the largest holding.

Reasons for the Sale

Buffett like to buy stocks and hold them forever. He has owned Coke-Cola for 36 years and American Express for 32 years. He is on record saying he won't sell even one share of Coke.

Apple has been the crown jewel of Buffett's portfolio for nearly a decade. Until 2016, he had not made any investment in the company. This changed when he bought 9.8 million (m) shares for US$ 1 bn. He vastly increased his stake in 2018.

Apple is a huge wealth creator. The stock is up about 270% in the last five years and about 5% in the last one year.

There's also the buyback to consider. Apple has announced a US$ 110 bn share buyback. As a buy and hold investor, Buffett's stake would have become more valuable after the buyback. But he sold despite this reality.

This could be explained by the fact that the buyback while huge nominally, is small compared to Apple's 2.8 trillion marketcap.

So, what's the real reason for the sale?

One explanation is that Buffett knows the market is too expensive and is thus, building his cash position - already huge at US$ 189 bn - to buy stocks in a big way when the market falls.

Buffett himself mentioned this at the annual meeting...

  • 'I don't mind at all, under current conditions, building the cash position. I think when I look at the alternative, what's available in the equity markets and what's going on in the world, we find it quite attractive.'

Does this mean that Buffett values the cash on Berkshire's books more than his favourite business?

Well, it's not so simple.

You see, there is the tax angle to this as well. Buffett explained that the US capital gains tax used to be as high as 50% for Berkshire. It's now 21%, a historic low. Buffett said he thinks the tax rate could go up. So, it's better to sell now than later.

  • 'They (the government) could change that percentage any year, I would say with the current fiscal policies, I think that something has to give. I think higher taxes are quite likely.

    If the government wants to take more of your income or mine or Berkshire's, they can do it. They may decide that they don't want the fiscal deficit to be this large because that has some important consequences.

    They may not decrease spending a lot. They may decide they will take a larger percentage of what we earn, and we'll pay it.'

So, it this the answer?

Maybe not. If we take this explanation at face value, we will have to accept that Buffett intended to sell Apple anyway, either now or later.

This would mean that he doesn't consider Apple as a buy and hold forever investment.

Why is that? Is there something fundamentally wrong with Apple about which we don't know? Or does Buffett think the company's best days are behind it, and Apple's low growth of the last few years is the new normal?

If this is the case, then it's important to understand that Buffett would never admit this publicly. Apple is just too large a holding. If he said anything negative about Apple, stock could suffer a big fall. The US markets as a whole could also take a sentiment blow.

So, Buffett could be trying to diversify and move away from the focused investing approach a little. After, all, one stock being 50% of the portfolio might be too much for Buffett. But then the question arises, about buying so many shares in the first place.

Why didn't Buffett give a straight answer when asked this question at Berkshire's annual meeting?

Well, the answer could be that he sees bad times ahead for the market. Apple is his largest holding and is trading at a high PE ratio, by historical standards, of about 28. So, Buffett decided that Apple should be the first stock to be sold.

Buffett doesn't want to hint that the US market is overvalued or that Apple is overvalued, so as to not cause a panic in the market.

Does this mean that he will sell more of the stock? Will he sell other stock in his portfolio?

He might do it if he thinks the stocks are overvalued and that cash is a better investment at this time.

The Big Question

Should we conclude, based on this analysis, that Buffett thinks the stock market is nearing a top?

Well, timing the market is extremely difficult, even for Warren Buffett.

The sale may just be a prudent portfolio management move. But if he does think the market could fall, then taking some money off the table makes sense.

However, this doesn't mean the market is going to fall in the short term. The market could surprise everyone by going higher before a correction.

Thus, it's important to keep in mind that time in the market is more important than timing the market.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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