Warren Buffett, the legendary investor renowned for his buy-and-hold strategy and value investing approach, made a surprising move last Saturday (3 August 2024). His conglomerate, Berkshire Hathaway, reduced its stake in Apple Inc. by 50% as part of a significant second-quarter selling spree. This decision to drastically cut back on Apple holdings appears to contradict Buffett’s previous praise of the company as ‘probably the best business I know in the world’, leaving many investors puzzled and seeking answers.
The sale in numbers
Berkshire Hathaway’s second-quarter earnings report revealed that the conglomerate reduced its stake in Apple from approximately US$140 billion at the end of March to around US$84 billion. Since the end of 2023, Berkshire has sold 505 million Apple shares, with 115 million sold in the first quarter and an additional 390 million in the second quarter. In total, that amounts to a 55.8% decrease in Berkshire’s Apple holdings since the start of the year.
Along with Apple, Berkshire also reduced its stake in its second-largest position, Bank of America, by 8.8% since mid-July, bringing its holdings to US$41.1 billion. With a net sale of US$75.5 billion in stocks, Berkshire’s cash holdings grew to a record high of US$276.9 billion as of 30 June 2024, up from the previous record of US$189 billion three months earlier.
Market reaction and expert opinions
Many analysts view Berkshire’s decision more as a portfolio management move rather than a fundamental shift in the outlook for Apple.
- Joe Gilbert, senior portfolio manager at Integrity Asset Management, stated: ‘Buffett’s reduction of his Apple stake is merely about risk management. If there were any concerns about the longer-term viability of Apple, Buffett would have exited the entire position.’
- Cathy Seifert, a research analyst at CFRA, suggested that the move could be about balancing Berkshire’s holdings: ‘If you’ve got this outsized position, you take some profits, and you reduce some of your concentration risks.’
- Wedbush analyst Dan Ives remains bullish on Apple, stating: ‘While some could read this as confidence worry, Apple just delivered a robust quarter with a massive AI-driven super-cycle ahead, and we do not view this as the time to hit the exit button.’
Despite the experts reassuring the public, the market reacted noticeably to the news. When the stock market reopened on Monday, 5 August, Apple’s stock price dropped 4.82%. However, one thing to note is that this occurred when the broader market also experienced a significant decline, with the S&P 500 falling 3%. This suggests that while the news may have impacted Apple’s stock price, other market factors were also at play.
Potential reasons behind the sale
It is also not the first time Berkshire has cut its stake in Apple. At its May annual meeting, the firm revealed that it had reduced its position during the first quarter of the year and hinted that it was due to tax implications.
We may never know the real reason behind the firm’s selling action if no hints are provided. However, we can gauge potential reasons from different aspects:
- Valuation concerns: Apple’s stock price has seen substantial growth in recent years, with its valuation multiple reaching 33 times future profits as of mid-July, 11 points higher than that of the broader S&P 500. This gap was last seen in the aftermath of the pandemic and the financial crisis. A little history goes back to when Berkshire started buying substantial stakes in Apple in 2017 and 2018; the price-to-earnings (PE) ratio averaged only 17 times. Buffett, true to his value investing principles, may have felt that the stock was becoming overvalued relative to its fundamentals.
- Beefing up cash position: This move could be considered a defensive strategy to increase Berkshire’s cash reserve. Considering its record high cash holdings, bolstered by its cash-generative insurance segment and the substantial sale of Apple, Berkshire Hathaway might be preparing for something significant on the horizon. Jim Awad, senior managing director at Clearstead Advisors, suggested: ‘Buffett may feel we’re about to go into a recession, so by raising cash now, he will be able to buy companies cheap later on. He may smell an opportunity coming.’
Should investors follow suit?
While it’s tempting to follow the Oracle of Omaha’s lead, investors should also consider their own financial situations and investment goals before making any drastic moves. Your investment horizon, risk tolerance, and portfolio composition likely differ from Berkshire’s. If Apple represents a large portion of your portfolio, some rebalancing might be prudent, but remember that Berkshire still maintains a substantial position in Apple.
Attempting to time the market based on others’ actions, even those of legendary investors, can be risky, especially given that this information is already delayed. Instead, revisit your initial investment thesis for Apple and evaluate whether it remains valid. Make decisions that align with your individual investment needs and objectives.
The fifth perspective
Berkshire’s significant reduction in its Apple stake offers valuable insights into the thinking of one of the world’s most successful investors. Whether it is due to valuation concerns, a strategy to beef up cash reserves, or perhaps Buffett sensing something that others have missed, it remains essential for individual investors to make decisions based on their own research and financial goals. This event serves as a reminder of the importance of regularly reassessing our investments. As always in investing, it is crucial to stay informed, think independently, and avoid knee-jerk reactions to market news.
Back in August 2020 I remember reading that Berkshire Hathaway’s holding in Apple was worth half of its own market cap. Considering that BRK was >30% of my own US portfolio at the time I decided to scale back my holding in BRK and redeploy the capital elsewhere. In my case it was to switch over to the MOAT ETF. The MOAT ETF actually pays a dividend as well (although it’s subject to 30% withholding tax). Five years later I just did some back-testing. Interestingly factoring in the dividend distributions BRK and MOAT (on a mark-to-mark basis) have both performed about the same, with BRK doing just a little bit better if we want to be picky. Either way I’m happy with both of them.
I think Warren Buffett has decided to reduce his position in Apple for one simple reason, and that reason is to reduce “concentration risk”. Even if we all agree that Apple is a great business with great products and superb after-market support (which is what I think) bad things can happen out of the blue, i.e. a “black swan event”. Reducing exposure to a single company is simply good risk management. I adopt a 5% rule across all four my portfolios (i.e. 5% of the total of all my investments). It helps me sleep at night!
Hi Jonathan, thank you for sharing your experience and the interesting back-testing results! Like you mentioned, Apple is the largest portion of the overall portfolio, and Warren Buffett’s decision to trim Apple’s stake is likely a smart move to manage risk and be prepared for any potential black swan events. Your 5% rule is a smart and disciplined strategy to keep your investment diversified and manage the volatility. Great to hear different approaches to stay secure in the market!