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"The God of Stocks" Buffett has been very active recently.

After continuously reducing its holdings in its second largest holding, Bank of America, Berkshire's second quarter report showed that his actions had already begun. With the holdings of its largest holding, Apple, halved, the cash holdings of the "Oracle of Omaha"'s companies have reached a staggering $276.9 billion. Why did Buffett choose to cash out so much, and what might he do next?

Cash reserves surge

The second quarter of 2024 marked Berkshire's seventh consecutive quarter of net selling of U.S. stocks.As of June 30, Berkshire's cash reserves grew to $276.9 billion from a record $189 billion three months earlier.

What attracted widespread attention was that Buffett sold about 390 million shares of Apple this time. As of June 30, Berkshire still held about 400 million shares, worth $84.2 billion. As a result, Apple's stock price plummeted 4.8% on the 5th. Since first building a position in 2015, Buffett has frequently praised the iPhone maker's leadership and market dominance. With the holding weight exceeding 50%, many investors have expressed concerns that Apple accounts for too large a proportion of Berkshire's investment portfolio.

When asked at this year's shareholders' meeting why he began to reduce his holdings in Apple, Buffett said it was for tax reasons. He praised Cook as the "best partner" after Jobs and that the iPhone may be the greatest product ever. "Unless something dramatic happens that really changes capital allocation, we will keep Apple as our largest investment. When (I) retire and Abel takes over, Berkshire will continue to own its current heavy holdings, such as Apple, Coca-Cola and American Express," he said.

According to the agency's calculations, the average purchase price of Buffett's reduced holdings in the first quarter was $39.62 per share, while the average price of Apple's stock in the same period was $182, and Buffett's book profit was 359%. The current corporate tax rate is a uniform 21%, which means that Berkshire will have to pay the US government $29.90 out of the estimated profit of $142.38 per share. Considering the problem of high US debt, tax increases may become an important option for future governments. The Biden administration has proposed raising the corporate tax rate to 28%, which may be the reason for Buffett to choose to take the money and run.

Secondly, caution about artificial intelligence (AI) may also be a reason for the reduction. In June this year, Apple officially launched the artificial intelligence system Apple Intelligence, which is part of Apple's bold efforts to catch up with large technology competitors. Buffett once said that he "knew nothing" about it. "I also mentioned last year that we have let the genie jump out of the bottle, especially when we invented nuclear weapons before, and it is now doing some bad things. The power of this genie sometimes scares me, and it can no longer be stuffed back into the bottle. I think AI may be somewhat similar and has made it jump out."

Third, Apple's forward price-to-earnings ratio is close to 30 times, higher than companies such as Meta Platforms (23 times) and Alphabet (24 times). Compared with its competitors, Apple still needs to come up with real products to justify its valuation.

Selling off Bank of America is on the horizon

Before Apple, the outside world has noticed Berkshire's recent continuous reduction of its holdings in Bank of America. Generally speaking, Berkshire often discloses its position changes in the 13-F filing released 45 days after the end of the quarter. However, when holding more than 10% of a company's shares and trading, it needs to submit a disclosure immediately.

According to regulatory filings released last week, Berkshire sold about 19.2 million shares of Bank of America between July 30 and August 1. Since July 17, Berkshire has sold 90.4 million shares of Bank of America in three weeks, with a total value of nearly $3.8 billion. The company is still the largest shareholder of Bank of America, with 942.4 million shares, accounting for about 12.1% of the issued shares, worth about $37.2 billion.

As the two major holdings were reduced, the outside world believed that the "God of Stocks" might be increasingly wary of the overall US economy or the overvalued stock market. Cathy Seifert, an analyst at investment bank CFRA Research, said: "If you look at the overall situation of Berkshire and the macroeconomic data, the conclusion is that Berkshire is taking defensive measures."

The fragility of the economy makes valuations appear even more dangerous. The "Buffett indicator" is the total market value divided by the gross domestic product. In 2001, the "God of Stocks" said that this may be the best single indicator to measure the valuation situation at any given moment. In early July, the "Buffett indicator" of U.S. stocks rose above 2, reaching its highest level since early 2022, when a correction caused by the Federal Reserve's interest rate hike ensued.

Doug Kass, founder and president of hedge fund Seabreeze Partners Management, said this is a very strong warning signal. It has been quite reliable in the past, showing that stocks are extremely overvalued relative to U.S. economic output before the big sell-offs in 1987, 2000 and on the eve of the financial crisis. Kass further analyzed that when the indicator reaches two standard deviations above the long-term average, investors should start to pay attention, and this level was also reached in July.

It is worth mentioning that the "Buffett indicator" is not the only indicator that US stocks are overvalued. Cass said that other popular valuation indicators, including forward price-to-earnings ratio, static price-to-earnings ratio and price-to-sales ratio, are all above the historical 90th percentile.

“Buffett seems to think there are no attractive opportunities in publicly traded stocks, including his own,” said Jim Shanahan, an analyst at investment firm Edward Jones, after analyzing last quarter’s buyback data. “That makes me concerned about his view of the market and the economy.”

What happens next?

The Oracle of Omaha has also repeatedly expressed his confidence in the future of the United States, saying he would not short the U.S. Therefore, reducing holdings has become the main means of risk management for Berkshire's asset portfolio.As of the second quarter of this year, the company has been a net seller for seven consecutive quarters, and the scale of its share reduction last quarter exceeded the total of US$56.09 billion between October 1, 2022 and March 31, 2024.

Yicai Global found that except for Western Petroleum and Bank of America, other changes in holdings only occurred at the end of the quarter. This also means that the sell-off, including Apple, may still be ongoing.

Judging from the size of its cash reserves since this century, Berkshire tends to raise large amounts of funds on the eve of interest rate cuts or crises.In 2008, Buffett shouted "Buy America" ​​and spent $5 billion to acquire a stake in Goldman Sachs to obtain preferred shares with a dividend rate of 10%. This transaction brought him rich returns. In 2020, the "God of Stocks" continuously established or increased holdings in many companies, mainly involving pharmaceutical, telecommunications and oil stocks, which also performed well.

Buffett once compared Wall Street to a "casino." Through value investing and buy-and-hold, the "God of Stocks" has left the world with valuable lessons: patience and foresight are far more important than trying to grasp short-term stock fluctuations. This time, facing the uncertainties of the election, geopolitics, and the Federal Reserve, he once again chose to wait and hold on to his money.

On August 30 this year, the "God of Stocks" will be 94 years old. Therefore, many market opinions believe that considering his advanced age, Buffett also hopes to leave more operational flexibility to his successor when he retires. Berkshire can now obtain a generous cash return by investing in short-term government bonds, which makes the reason for cash reserves even more sufficient.

So, how long is it until Buffett and Berkshire's next big entry?