Why Is Berkshire Selling Goldman Sachs?

Few investors make as many accurate long-term predictions as Warren Buffett. Every move he makes gets repeated by other people looking to benefit from his decades of experience and insight.

Recently, Berkshire Hathaway started dumping bank stocks in favor of gold. Buffett went so far as to sell all shares of Goldman Sachs. Historically, Buffett has put his trust in the banking industry. What changed to make him drop his Goldman Sachs investments?

Buffett Selling Goldman Sachs Is a Warning

Berkshire Hathaway sold a lot of shares in companies that it expects coronavirus will damage. Somewhat surprisingly, though, Goldman Sachs doesn’t seem to fit that mold.

When Buffett sold the shares in May, they had a value of about $180. That’s far below the bank’s record. In March 2018, share prices exceeded $270. But the world has changed and Buffett hasn’t let higher prices in the past influence his decisions about where he believes prices will go in the future.

Buffett must believe something in the near future will hurt the company. More likely than not, he worries that a load of defaults will push share values lower than normal.

Depending on how aggressively the federal government supports borrowers and lenders, the country could face another loan crisis that leads to a long recession.

Is Goldman susceptible to an economic storm on the horizon? Buffett appears to think so and he’s selling Goldman as a result.

Goldman Isn’t the Only Stock Buffett’s Selling

It’s worth noting that Berkshire Hathaway has sold stocks in several banks during spring and summer. The investment company has sold shares in PNC, Wells Fargo, and JPMorgan Chase.

Goldman Sachs is the only banking institution that Berkshire Hathaway dumped completely. That seems odd to many investors because Goldman Sachs has been revered as the premier bank for a very long time.

Despite what looks like a benefit to Goldman Sachs, Buffett sold all of the bank’s shares while getting rid of 61% of Berkshire Hathaway’s shares in JPMorgan Chase.

Keep in mind that Buffett is a cautious investor. He keeps a close eye on the market and plays essential roles in managing the companies he supports. Over the next few months, Berkshire Hathaway could sell more shares in the banking industry.

He has famously said when he owns shares of a company he generally buys because he would be happy to buy the whole company. So when he sells does he want to exit completely? And will this precipitate more selling… we’ll see when his next 13F filing comes out.

Buffett Is Buying Gold

Buffett has spent decades denying that gold makes a good investment. Gold might maintain its value well, but it doesn’t pay a dividend or generate earnings.

To Buffett, it has always made more sense to buy stocks and bonds that pay dividends to owners instead of a commodity that only retains its value.

Buffett is a pragmatist above anything else. He understands that the investing landscape changes over time. As certain stocks falter, he will alter his thinking to take advantage of any available opportunity. That could mean that he has changed his mind – at least temporarily – on gold.

Don’t make too much of Berkshire Hathaway’s new interest in gold, though. The investment company recently bought 21 million shares in Barrick Gold. The company didn’t actually invest in gold. Instead, it bought shares in a mining company. There’s a subtle difference that might provide a window into Buffett’s thinking.

Buffett may not have changed his mind about gold as a bad investment option. He may, however, have predicted that many people will turn to gold as the economy becomes increasingly uncertain over the next several months and years.

Assuming that more people invest in gold, it makes sense to own stock in a company that focuses on mining the precious metal.

Buffett Indicator Screams High Risk

Regardless of why Buffett has decided to dump banks in exchange for mining, his change screams “high risk.” This is the time for investors to pay close attention to what the Oracle of Omaha does with Berkshire Hathaway’s clout.

American people and businesses simply do not have the money that they need to repay their loans. Now that workers have lost their $600 unemployment insurance payments, they will run out of savings quickly.

Once that happens, they may not have enough money to pay rent. Expect that problem to trickle down to landlords, who will then not have enough money to pay mortgages to banks.

The mortgage problem will extend to single-family housing. More than half of American households spend 50% of their incomes on housing costs. Among households that earn $50,000 to $74,999 per month, 11% say that they have no confidence and 19% say they have slight confidence that they can pay next month’s rent.

Even if state and federal agencies issued a moratorium on loans, banks would lose money. Bank stocks will fall even if the government promises to pay for loans.

As of August 2020, the IRS still says it has not sent 50,000 stimulus checks. It plans to finish by the end of September. Can banks expect the government to act more efficiently when covering millions of loan payments? Considering that Buffett has lost much of his faith in the banking industry, the near future does not look optimistic.

Why Is Buffett Selling Goldman Sachs: Summary

Only the decision-makers within Berkshire Hathaway know why Buffett is selling Goldman Sacks. There are plenty of clues, though, that investors should consider. It seems likely that:

• Buffett believes the banking industry will get hit hard by the continued recession.
• More people will turn to gold as a way to protect their wealth.
• Buying stock in mining companies offers a more effective option to grow wealth instead of just protect it.
• Even if the government tries to support banks, any failure will lead to falling stock values.

Buffett hasn’t completely pulled out of the banking industry, but he has moved a considerable amount of money way from the institutions he once believed in. Following his lead could help investors weather economic changes as the world adapts to a new normal with coronavirus.

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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.