Warren Buffett Sells Apple Stake. Is he Worried About a Market Correction?

We at Equitymaster, are fans of Warren Buffett's style of investing. Our editors have studied his strategies and how they have evolved over the years and decades.

We don't agree with everything he says or does but we understand them very well. Every time he is in the news, we are eager to know his views and latest actions in the market.

Buffett has been in the news a lot recently. The biggest talking point has been the record high cash pile of US$ 277 billion (bn) at Berkshire Hathaway, his investment holding company. The company has raised its cash position in the June quarter to 25% of its total assets.

The amount of cash, which has been rising steadily, is bigger that the GDP of many countries. Recently, Buffett added to the cash pile when he sold about half the shares of his biggest holding, Apple Inc.

In this editorial, we will cover the details of Buffett's latest actions.

Read on...

Apple Stake Sale

At Berkshire Hathaway's annual meeting in May, Buffett revealed that he had reduced his stake in Apple. At that time, Buffett said Apple was still a great company. He even called the iPhone one of the greatest products of all time.

In fact, he even compared Apple with two other core holdings in the portfolio - American Express and Coca Cola - saying Apple was a more wonderful business than these two.

But he kept on selling the stock.

Earlier this month, Berkshire Hathaway announced that it had sold nearly half its position in Apple.

He gave a hint that the sale could be for tax reasons. Of course, it could be a simple case of good portfolio management. Buffett could be just reducing the size of Apple stock in the overall portfolio.

There is also the reason of valuations. Buffett could be playing the good old fashioned game of 'buy low and sell high.'

When Buffett started buying Apple shares in 2016, the stock's PE ratio was around 10. In other words, it was cheap. Today, Apple's PE ratio is close to 35. This makes it expensive for someone like Buffett who is a price conscious investor.

However, there is speculation that the real reason could be something else. Does Warren Buffett know something the rest of the market does not?

Overvalued Stock Market?

There is no shortage of speculation right now that Buffett thinks the market will fall. The reason given for this is the US stock market's valuations.

The US stock market is expensive. The three benchmark US stock indices, Dow Jones Industrial Average, NASDAQ, and S&P 500 are trading at PE ratios of 25, 40, and 27.5 respectively. The are high by historical standards.

When markets are expensive, smart investors sell stocks and build up their cash reserves. This enables them to buy stocks when the market falls.

This is exactly what the latest quarterly filings of Buffett's Hathaway reveals. The company has reduced stakes in Bank of America, Chevron, Capital One, Floor & Decor Holdings, T-Mobile, and Louisiana Pacific. Buffett also sold Berkshire Hataway's entire stake in Snowflake, a data analytics company.

Earlier, in May, during Berkshire's annual general meeting (AGM), Buffett had clarified he was not in a rush to buy more stocks. If the US stock market were not expensive, he would have found many opportunities to buy stocks.

But this is not the case.

Is Buffett Preparing for a Big Stock Market Correction?

This is a difficult question to answer. However, if we had to guess, we would say yes, he is.

Now when such a correction will happen is an entirely different question. It could come soon or Buffett may have to wait a few years.

We know that Buffett has no problem waiting for a correction while sitting on a huge pile of cash. He has done this many times before.

This is why investors in India should not be too concerned about a market correction. These are completely normal events in stock markets.

In fact, regular market corrections are healthy from a long-term investing perspective. It prevents investors from getting too greedy and also prevents investors from becoming too fearful.

Conclusion

Buffett is a great investor and he may have many reasons to sell his holdings. One of those reasons could be the high valuations of the US stock market.

This should not impact your long term investing strategy. History is proof that some of the largest gains have come from investing in long-term stocks. This is what Buffett does very well.

The key to finding the best long-term stocks is to do what Buffett does. Look at all the aspects of the company like growth opportunities for both revenues and profits, quality of the management, financial performance, track record of dividends, and much more.

Consider all these points holistically. The best stocks for the long term are the ones that have a tick mark against all of them.

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...