November 8th, 2024
By Eric Platt
Warren Buffett is unwinding his most profitable trade in history, filling Berkshire Hathaway Inc.’s coffers with cash. But it is unclear if the Oracle of Omaha is ready to go elephant-hunting with his recent bounty.
Buffett last Saturday revealed that he had continued to slash his position in iPhone maker Apple Inc. and other stocks in the third quarter, generating US$97 billion in gains for Berkshire Hathaway, the sprawling industrial-to-insurance conglomerate he has controlled since 1965.
By crystallizing a gain, Buffett has raised Berkshire’s cash levels to unprecedented heights. At US$325 billion, cash now accounts for 28% of Berkshire’s asset value — the highest level since at least 1990. And it has left his followers attempting to pinpoint the motivation for the sale.
Some investors and analysts believe Buffett, who trained under legendary value investor Benjamin Graham — first at Columbia University and then at Graham’s investment firm — is sticking to his principles. They point to Apple’s relatively high price-to-earnings ratio compared with its potential earnings growth.
Apple warned investors this week that its future products may never be as profitable as the iPhone, as it ploughs capital into artificial intelligence to try to catch up with rivals including Google owner Alphabet Inc.
Buffett has also limited his buying of other stocks this year, purchasing equities worth just US$5.8 billion through the end of September. That sum is dwarfed by the US$133.2 billion of stock sales Berkshire has executed.
The sales have reduced the equity risk Berkshire is taking and gives it ample liquidity to invest, which it has put to work in past times of stress.
Berkshire has always run a large cash position, in part to satisfy regulations that it has enough liquidity in its investment portfolio to pay out future claims from its mammoth insurance operation.
The investment in Apple dates back to 2016 when the company bought just under 10 million shares worth US$1.1 billion. The purchases were a shock, given Berkshire had long avoided fast-growing technology companies. As recently as 2012, Buffett had told shareholders that even with its growing profitability, he “wouldn’t want to buy” Apple.
The initial investment was made by Buffett’s deputy Ted Weschler, according to a person with knowledge of the matter. In the months that followed, Buffett himself came to appreciate the company’s business model, won over by the amount of time customers spent using their iPhones and that few were willing to switch to a competitor once they had bought one.
Buffett soon followed Weschler with his own buying spree, and alongside a small fund run by a subsidiary, Berkshire amassed a 5.9% stake in Apple. At its peak last year, the position was worth nearly US$178 billion. Quarterly disclosures analyzed by the Financial Times suggest that Berkshire spent about US$39 billion.
The iPhone maker’s shares trade at more than 30 times its projected earnings over the next year, according to FactSet. Darren Pollock, a fund manager at investment group Cheviot and a Berkshire shareholder, notes that when Buffett was buying, that multiple was closer to 12 or 13 times and that “Apple was growing at a significantly faster rate.”
“When stocks are overvalued, Berkshire’s cash piles up because Buffett is finding less and less to buy,” Pollock added. “He’s not a market timer. Selling down Apple and having this much cash in a richly valued market is classic Buffett.”
Investors will have to wait another three months before they know for sure. The company told the FT that Buffett was waiting to share any thoughts on the matter for his annual letter due in February.