In This Article:
One of the most surprising bits of news from this year's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholder's meeting was the reduction in its position in Apple (NASDAQ: AAPL) stock. The revelation that Berkshire's Apple position is now worth $135.4 billion implies that Warren Buffett's company holds around 790 million, marking a reduction of about 13%.
Dumping more than 100 million shares in a short time frame naturally leads to questions as to why. Buffett implied the sale was for tax reasons, possibly in anticipation of higher tax rates in future years.
Nonetheless, Berkshire's history with Apple offers valuable investment lessons, and investors should know three things about Berkshire's sale of Apple stock.
1. Apple is no longer a bargain stock
Most investors know Buffett tends to seek bargains. When Buffett's investment managers first talked him into buying Apple in 2016, Apple stock rarely exceeded a 20 P/E ratio, trading between 12 and 18 times earnings.
Additionally, Berkshire bought most of its shares between the second quarter of 2016 and the second quarter of 2018. Its market cap was between $500 billion and $900 billion at that time, compared to $2.8 trillion today. While that investment may have taken some time to bear fruit, Apple has earned considerable returns for Buffett's company.
Today, Apple's P/E ratio is around 28, and it has often traded at a 30 earnings multiple over the last year, a factor that could have led to the decision to sell some of the shares.
2. Holding cash is important
The Apple sale increased Berkshire's cash hoard to $189 billion, up from $168 billion in the fourth quarter. This takes its liquidity position to record highs.
To put that into perspective, only 50 companies trading on U.S. exchanges have a market cap higher than $189 billion. Apple itself has followed this lead with around $162 billion in fair value liquidity.
That may lead to speculation about the market's near-term direction and what Berkshire plans to do with this cash. Even though interest rates have risen, storing this cash in short-term Treasurys is probably not the company's long-term plan.
As mentioned before, Buffett likes to buy bargains. The market's Shiller P/E ratio, which is the price divided by the average of 10 years of earnings, is 34, well above the mean of 17 going back to 1871.
That multiple indicates the market has become expensive, but whether that implies a near-term market downturn remains to be seen. Timing the market is nearly impossible, even for a seasoned investor like Buffett. Nonetheless, if a sell-off leads to more underpriced stocks, having the cash available to act when stocks are inexpensive can boost overall returns.