Warren Buffett is preserving Berkshire Hathaway’s “Financial Fort Knox,” veteran investor says

Warren Buffett should cash out some of his $110 billion of Apple stock, according to a veteran shareholder of the famed investor’s Berkshire Hathaway conglomerate.

“Apple’s shares have appreciated meteorically and are quite expensive relative to the company’s earnings power,” Darren Pollock, portfolio manager of Cheviot Value Management, told Business Insider.

“We would not be averse to Berkshire trimming back its gigantic stake in Apple,” he continued.

As of the time of the interview, Cheviot held $50 million in Berkshire shares. Buffett’s company has been the firm’s biggest holding for more than 20 years.

Time to Pare Apple

Pollock’s stance is a little surprising, given Buffett has more than tripled his money on Apple in less than five years, and another commentator recently lauded it as “one of the best investments ever.”

Berkshire spent about $35 billion between 2016 and 2018 to amass roughly 245 million shares in the tech titan. Apple’s stock price has soared more than 50% this year alone, boosting the value of Berkshire’s 5.7% stake to north of $110 billion.

However, the position is definitely outsized. It is Berkshire’s biggest holding by far, making up more than 40% of the total value of its stock portfolio. Berkshire’s market capitalization is about $510 billion, suggesting its Apple stake accounts for more than 20% of its entire value.

Pollock recognized Buffett is unlikely to pare his Apple position, given his “favorite holding period is forever.” However, he questioned whether the Berkshire chief might regret not realizing some of his gains.

“It will be interesting to see if he looks past Apple’s current overvaluation the same way he did Coca-Cola’s in the late 1990s, from which point Coke’s richly priced shares made it a subpar investment for a very long time,” Pollock said.

Coca-Cola stock quadrupled in price to about $43 between 1994 and 1998. However, it soon tumbled and took about 15 years to reach that level again.

Trusting Buffett to Spend Wisely

When the coronavirus pandemic tanked markets in March and April, Buffett was widely expected to snap up bargains and strike lucrative bailout deals as he did during the financial crisis of 2008.

Instead, he dumped the “big four” airline stocks and added $20 billion to Berkshire’s cash pile in the first half of this year, boosting it to a record $147 billion.

Pollock explained to Business Insider why the billionaire investor took no chances.

“Buffett prefers holding excess cash and missing out on gains, compared with attempting to squeeze additional profit into the business at the risk of jeopardizing the ‘financial Fort Knox’ that he’s carefully created over time,” he said.

“We have no problem with Buffett and his team husbanding cash and remaining patient for better opportunities.”

Pollock further explained Buffett’s caution by referencing a conversation he had with Buffett’s right-hand man and Berkshire’s vice-chairman in 2017.

“One night Charlie Munger made it very clear to me that Buffett will not be taking risk with Berkshire’s assets because he views the company’s survivability as paramount and preserving the company’s durability will — at a minimum — afford shareholders satisfactory long-term growth,” he said.

Berkshire’s massive insurance business also exposes it to catastrophes, and a global pandemic doesn’t preclude a major hurricane or earthquake causing an enormous spike in payouts, Pollock continued.

Moreover, Buffett knows that many people have entrusted their life savings to Berkshire, and he’s “unwilling to gamble with something so important to so many shareholders,” he added.

Deals, Buybacks, and Stock Purchases

Pollock touched on several recent developments at Berkshire.
He praised its $10 billion acquisition of Dominion Energy’s natural-gas assets in July, as “these relatively small deals can add up quite nicely.”

Pollock also cheered the recent surge in stock buybacks. Buffett repurchased a record $5.1 billion of his company’s stock last quarter, and appears to have bought back at least $2 billion more in July.

“It’s nice to see Buffett taking advantage of very low prices for Berkshire shares,” he said.

Berkshire stock continues to trail the broader market. It is currently down about 7% this year, while the benchmark S&P 500 index is up about 4%.

Pollock also gave the thumbs-up to Buffett for plowing $2 billion into Bank of America stock in under three weeks.

The banking giant is in better shape than it was before the financial crisis, its shares trade at an enticing valuation, and it doesn’t have the reputational and regulatory baggage of Wells Fargo, Pollock said.

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