As Warren Buffett winds down his 60-year career at Berkshire Hathaway, the Oracle of Omaha is still actively buying and selling stocks. One of the moves Berkshire made in Q3 was the sale of 41.8 million shares of Apple (NASDAQ:AAPL), representing about 14.9 percent of the remaining stake in the consumer tech giant. Q3 was the sixth quarter in the last two years of selling AAPL at Berkshire Hathaway, with more than 675 million shares having been sold off since Q4 of 2023. Why did Buffett sell so much of his Apple stock, and what might these sales suggest about the legendary stockpicker’s views about the broader market?
Is Apple’s Valuation To Blame?
One of the most obvious explanations for Buffett’s decision to gradually trim his position in Apple is the stock’s rising valuation over the past couple of years. When Buffett started his selling streak in Q4 of 2023, shares of AAPL traded at around 30 times earnings. Today, Apple is priced at 36.4 times earnings.
With the P/E multiple expanding as earnings have risen and tech stock hype has propelled the Magnificent Seven, Buffett and his team may have decided that the stock looks too expensive to own such large quantities of.
Another point that’s worth noting is the fact that Apple’s share price gains caused it to become a larger and larger portion of the Berkshire portfolio, potentially introducing concentration risk that even Buffett may have found excessive.
Even after all of the selling of the past two years, Apple still makes up more than 23 percent of the Berkshire portfolio. If Buffett hadn’t sold some of his stake, Berkshire’s performance may have risked becoming highly correlated with Apple’s. Though this may have been a positive for the investment conglomerate over the last couple of years, the long-term risks may have outweighed the short-term benefits.
Buffett’s Preference for Cash
While Apple has certainly been the most prominent, it isn’t the only stock Buffett has trimmed to bolster the Berkshire Hathaway cash stockpile. As of the time of this writing, Berkshire has a cash reserve of over $380 billion and actively owns nearly double the number of US Treasury Bills held by the Federal Reserve itself.
This pattern of rapid cash accumulation has been a feature at Berkshire for multiple years, and it’s likely to keep going until either Buffett or his upcoming successors find opportunities to put such large amounts of capital to work.
In part, the preference to hold large amounts of cash may reflect Buffett’s belief that the market as a whole has become overvalued. One of his best-known metrics, namely the ratio between total stock market capitalization and GDP, has been signaling significant overvaluation for quite some time.
Today, this so-called Buffett Indicator is at 230 percent, more than 75 percent above the historical average. As a result, Buffett’s successors at Berkshire Hathaway may be well-served by having a large reserve of cash to deploy if and when the overall market’s valuation becomes more reasonable.
Aside from the market’s overall valuation, it’s also worth taking into account the advantages that cash affords Berkshire as a business known for making large investments in undervalued businesses, often during periods of market duress when other investors struggle to find cash.
By building up a cash stockpile from the profits generated by the massive Apple stake, Buffett may be giving his successors the ability to deploy enormous amounts of capital if and when future selloffs present exceptional investment opportunities.
This decision to pull back to cash may also tie in with a simple profit-taking explanation. Because of the heavy buying that Berkshire Hathaway engaged in about 10 years ago, its average cost basis on AAPL is only about $39.60. The average price Buffett sold the shares for during Q3, by contrast, was over $225. Though Buffett is well-known for his buy-and-hold approach to investing and his rejection of many parts of modern portfolio theory, it’s entirely possible that such large gains on Berkshire’s largest holding may have made Buffett decide to do some strategic profit-taking.
Has Buffett Reconsidered Apple as a Business?
One thing that seems quite clear is that Buffett’s selling doesn’t reflect a loss of faith in Apple itself. Indeed, Buffett directly addressed this matter during last year’s Berkshire Hathaway shareholder meeting. At that meeting, he compared Apple to long-term holdings like American Express and Coca-Cola in terms of business quality and indicated that Berkshire would likely continue owning Apple as its largest position for many years.
What Buffett did indicate about the selling, however, was that he saw cash as increasingly attractive when comparing it to the range of stocks with market caps large enough for Berkshire to invest heavily in. This statement likely adds some credence to the view that Buffett is currently putting a premium value on having a large cash reserve due to the opportunities it may give Berkshire in the future.
Why Buffett Sold Apple
Ultimately, the decision to sell AAPL shares at Berkshire likely comes down to a combination of high valuation, concentration risk and the belief that the cash generated from profit-taking could be deployed effectively in the future. While worries about excessive concentration may be unusual for Buffett, the basic idea of selling highly valued stocks and using the profits to later buy shares in undervalued ones is the essence of the value investing approach that Buffett has used successfully for over 60 years.
The selling, however, clearly doesn’t show a change of mind at Berkshire about Apple’s business quality. Buffett seems to remain confident in Apple, and there doesn’t seem to be any indication that incoming CEO Greg Abel’s views differ appreciably.
In fact, early signs are that the next generation at Berkshire may be more comfortable than Buffett and his late partner Charlie Munger with high-flying tech stocks, as evidenced by the purchase of over $4 billion worth of Amazon last quarter. As such, it seems very likely that AAPL will remain at the top of the Berkshire portfolio for the foreseeable future.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.