Warren Buffett is regarded as one of the greatest investors of all time, and he has the track record to justify that view.
Between when he took control of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) in 1965 and the end of last year, it produced compound annualized returns of 19.8% for shareholders. That's nearly twice the 10.2% average total return of the S&P 500 in that time. But it's when that growth rate gets compounded over time -- 58 years in this case -- that the performance gap becomes truly remarkable. Over that span, Berkshire's total return has been 140 times that of the index.
So, when Buffett makes changes in Berkshire's investment portfolio, the whole investing world pays attention. And he has been rapidly amassing a position in one super-safe investment -- a position that is approaching 50% of the company's entire investment portfolio.
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Buffett's biggest bets
Buffett has never been one to shy away from investing a lot of money into a single idea.
For example, he put a lot of money into Apple(NASDAQ: AAPL) between 2016 and 2018, spending around $36 billion on that stock over the period. At one point, Berkshire Hathaway's Apple stake grew to become about 50% of its equity portfolio, but Buffett has been selling the stock lately. His $75 billion sale of Apple stock during the second quarter cut Berkshire's remaining position nearly in half.
Buffett's stated reasoning for that move was that he wanted to take advantage of the current corporate tax rate. Under the 2017 tax law that cut corporate tax rates to their current level, the cuts are set to expire at the end of 2025, so he naturally expects them to increase in 2026 and beyond. But Buffett's decision to trim his Apple stake also suggests he views the shares as fairly valued or at best, only slightly undervalued relative to their intrinsic value. It wouldn't make sense to sell an asset well below its value to save on taxes.
Another big Berkshire stock holding is Bank of America(NYSE: BAC). Buffett acquired the stake in Bank of America through warrants he acquired by investing in preferred shares of the stock in 2011. That allowed him to buy a lot of common stock in 2017 at the bargain price of $7.14 per share. He then proceeded to add onto that holding.
Although Bank of America was once Buffett's second-largest holding, he's started selling shares of it too. Since the start of the third quarter, he's sold $7.2 billion worth of the bank stock. His reasoning appears to be the same as his reasoning behind Apple: Better to pay the taxes on Berkshire's profits now before the current low corporate tax rate expires. For reference, Buffett's average selling price for Bank of America stock recently has been more than $40 per share, nearly six times what he paid for it.
Apple and Bank of America aren't the only stocks Buffett's been selling recently. In fact, he's sold more stock than he bought in each of the past seven quarters, and based on his Bank of America sales in Q3, it looks like it will soon officially be two full years of consistent net selling for Buffett.
But he has to do something with the proceeds of all those stock sales. And Buffett has been piling the money into a super safe investment that's approaching 50% of his total investment portfolio.
Buffett's $300 billion bet
As Buffett sells stocks, he's been putting the funds into a very specific investment: short-term Treasury bills. These are Treasury bonds that mature within one year. Buffett prefers those maturing within six months or less. Through the first six months of 2024, Berkshire Hathaway padded its Treasury holdings by $94 billion.
The company held a total of $277 billion in Treasury bills and cash as of the end of the second quarter. Even as Buffett has sold shares, Berkshire's core operations continue to produce operating cash flow of roughly $12 billion to $13 billion each quarter. On top of that, Berkshire will collect roughly $3.5 billion in interest from the Treasuries it already holds. Add it all up, and Berkshire's position in short-term Treasury bills is rapidly approaching $300 billion (assuming Buffett hasn't found a great company to buy in the last 2 1/2 months).
For reference, based on publicly available reports, Berkshire's equity portfolio is worth just over $300 billion as of this writing. That means Buffett's Treasury position could be almost half of Berkshire's investment portfolio.
It's important to note Buffett prefers short-term Treasury bills; he won't invest in longer-dated government bonds. "We continue to believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments," Buffett wrote in Berkshire's latest quarterly report. Bonds with longer maturities usually provide higher yields, but come with more interest-rate risk. If market rates increase, the values of those bonds will decrease more than shorter maturity securities.
Buffett has been getting the best of both worlds recently. The inverted yield curve led to higher yields for short-term bonds compared to long-term bonds. But with the Federal Reserve set to start lowering interest rates shortly, short-term yields should fall faster than long-term yields, ultimately resulting in much less interest income for Berkshire Hathaway.
While Buffett suggested he's fine with holding hundreds of billions in Treasuries right now regardless of yield during Berkshire's shareholder meeting earlier this year, he may find alternatives more attractive as rates come down.
Should you follow Buffett?
Buffett is in charge of a $1 trillion conglomerate with investable assets that exceed $600 billion -- even more if you include the insurance float available to him for investment. The number of investments that could meaningfully move the needle for Berkshire Hathaway is relatively small.
On that score, the average retail investor is in a much more advantageous position. The entire investment universe is at their disposal. Buffett's actions and asset allocation suggest there aren't as many bargains in the stock market as there once were, but there are still plenty of great stocks to buy in the current environment.
Although the yield on cash savings right now may be more attractive than it has been in a long time, long-term investments in stocks have consistently produced the highest returns. Trying to time the market and pick just the right time to deploy a lot of cash is not a feat most individual investors should attempt. Even Buffett suggests that people should add to their investments during every market environment (bullish or bearish), spreading out their stock buys over time, and remaining consistent with their purchases.
It can sometimes be hard to resist the temptation to follow Buffett's lead, but it's important to remember that he's playing a slightly different game than the average investor.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
