Warren Buffett’s decision to sell stocks and raise record cash before sell-off sends wake-up call

Warren Buffett is looking quite prescient as global equity markets plunged after it was revealed over the weekend that the investing legend dumped a lot in stock, including half of his Apple stake, and raised an unprecedented cash fortress for Berkshire Hathaway in the second quarter.

While Buffett, 93, famously never times the market and advises others to not try to either, these moves are serving as a wake-up call to some of his followers on Wall Street, who believe he saw some things he does not like about the economy and market valuation.

Buffett has in fact been a net seller of equities for seven straight quarters with high valuations likely keeping him on the sidelines. The selling activity picked up significantly last quarter though with Berkshire offloading more than $US75 billion ($115.2b) in stocks in the period and raising the conglomerate’s cash pile to a record $US277b.

Many Buffett followers view the accelerated sale of his top holdings as a pessimistic call on markets and the economy. His bearish sentiment may be fanning the flames of recession fears that have already been growing in the markets after the recent disappointing jobs data.

“This looks alarming because you have a large and sophisticated investor with a really impressive long-term track record not putting any of his cash to work to buy stocks, and in fact, is massively liquidating,” James Shanahan, an Edward Jones analyst who covers Berkshire, said in an interview. “It looks like a really bad signal.”

‘Seismic shifts’

Not only did he cut the massive Apple holding by more than 49 per cent, but Buffett also started dumping Bank of America shares, his second biggest holding. What’s more, it appeared the Oracle of Omaha didn’t even find his own Berkshire shares attractive, buying back only $US345 million in the second quarter, significantly lower than the $US2b repurchased in each of the prior two quarters.

“These look like seismic shifts, and he could be betting on a recession,” Barbara Goodstein, Managing Partner at R360, said on CNBC’s Worldwide Exchange Monday.

“He’s playing both offense and defence at the same time, trimming exposure to potentially overvalued or risky sectors, while he’s keeping his powder dry for major acquisitions.”

Buffett was selling stocks last quarter when the S&P 500 rose to an all-time high in anticipation that the US would skirt a recession while squashing inflation. That expectation was called into question with a weaker-than-expected July jobs report.

The global markets fell into a deep rout on Monday as concerns about an economic slowdown deepened. The Dow Jones Industrial Average tumbled 1000 points at one point, while Japan’s Nikkei 225 plunged 12 per cent in its worst day since the 1987 Black Monday crash.

Buffett’s Berkshire was not immune despite his recent moves, dropping more than 3 per cent.

“You’ve got a huge seller in the market that may have been in front of some of this bad news, in front of the turn in the market, in front of the bear sentiment,” Shanahan said.

Risk management

Under the influence of his investing lieutenants Ted Weschler and Todd Combs, Buffett began acquiring Apple eight years ago, marking a shift in his usual avoidance in technology companies. The legendary investor has spoken highly of CEO Tim Cook’s leadership, the loyal consumer base of the iPhone as well as Apple’s consistent buyback strategy.

Berkshire’s stake in Apple had grown so much over the years that it took up half of the equity portfolio at one point, so some believe his decision to take profits was part of portfolio management to reduce that heavy concentration.

“It’s still Warren Buffett’s single largest position so it’s possible this will just be seen as risk management,” Jim Reid, Deutsche Bank’s head of global economics and thematic research, said in a note.

Tax saving?

When Buffett trimmed the Apple stake by 13 per cent in the first quarter, he hinted at the Berkshire annual meeting in May that it was for tax reasons. He said then that selling “a little Apple” this year would benefit Berkshire shareholders in the long run if the tax on capital gains is raised down the road by a US government wanting to plug a climbing fiscal deficit.

But the magnitude of this selling last quarter suggests it could be more than just a tax-saving strategy. There are also other stakes in the portfolio with lower cost basis than Apple that would be better candidates to trim for tax purposes.

“I would say with the president’s fiscal policies, I think that something has to give. And I think that higher taxes are quite likely. And the government wants to take a greater share of your income, or mine, or Berkshire’s, they can do it,” Buffett said at the annual meeting.

CNBC