What is going on at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)? In the last few months, the "Oracle of Omaha" has directed his firm to dump almost $10 billion of one of its largest holdings and a popular stock among institutional investors. The sales come as Berkshire sits on the largest pile of cash it's ever kept on the books. What does Warren Buffett know that Wall Street doesn't?
Buffett has made a career of patient, disciplined investing, focusing on backing great companies for the long haul rather than picking great stocks. As he puts it, "When you find a truly wonderful business, stick with it. Patience pays." His philosophy has made him one of the wealthiest people on the planet. So, investors pay attention when he makes big moves, like offloading roughly a quarter of one of his largest holdings.
Berkshire sells nearly $10 billion in Bank of America stock
The company in question, Bank of America, has been a key part of Berkshire's portfolio since Buffett helped prop up the bank in the wake of the financial crisis. He paid $5 billion for preferred stock and warrants to buy an additional 700 million shares at just over $7 per share before 2021.
Despite the state of the bank at the time, Buffett had faith. His patience and foresight paid off, and he exercised the warrants six years later for an on-paper profit of $12 billion. Buffett remained a net buyer of Bank of America until this year, when he began selling chunks of his firm's more than $40 billion stake.
As the sales began in July, the bank's stock price took a hit, but despite Berkshire's continued offloading, shares are up nearly 9% since its low after the sales began. Why is he selling while much of Wall Street seems to believe Bank of America is moving in the right direction?
Concerns about the macro picture, but it might be simpler than that
Buffett is remaining tight-lipped, refusing to comment in detail on the trades. While there's no way to know for sure what he's thinking, we can make an educated guess. I think it has less to do with Bank of America itself than with his larger strategy. After all, it's not the only holding that was slashed this year. Berkshire shed billions in Apple stock as well.
He may be worried that the market is overvalued and wants to prepare his firm. He is finding it increasingly irrational. In his 2023 shareholder letter, he said that "markets now exhibit far more casino-like behavior than they did when [he] was young."
If that's true, a major economic event is certainly possible. Given that Buffett believes Berkshire should play its role in helping the economy in the event of a sharp downturn, the firm needs a huge reserve of liquid assets that will allow it to not just protect itself but also to "help extinguish the financial fire," as Buffett wrote last year.
While this is possible, I think a more innocuous reason is at play. I think Buffett simply believes that both Apple and Bank of America, while still wonderful companies, don't have the upside he's looking for moving forward. Better opportunities exist. He may be setting up another major buy or series of buys. We'll have to wait and see. However, there is one stock he's continuing to buy, purchasing $345 million of it last quarter.
Since the beginning of the year, Berkshire has repurchased nearly $3 billion of its own stock. This is one of the primary ways Buffett rewards his shareholders, as the company doesn't issue a dividend. The continued repurchases are a good sign that he believes in his own company since Buffett can repurchase his stock only if he believes it to be undervalued at the moment. If he's buying shares, Berkshire has the implicit blessing of one of the best investors in history.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Does Warren Buffett Know Something Wall Street Doesn't? The Billionaire Legend Dumps $9.6 Billion of Key Holding While Buying $345 Million of His Favorite Stock. was originally published by The Motley Fool