Why Avoid Emulating Warren Buffett's Approach When Trading Apple Shares
Despite the fast-paced technological evolution, it's hard to dispute that Apple's (AAPL -1.78%) stock will keep dominating the long-term investment scene. Although its AI abilities might not get as much attention as firms like Nvidia or Palantir, Apple's vast resources, technological advancements, and steadfast customer loyalty will ensure its prominent position within its sector for quite some time.
Investors might find it difficult to reconcile the investment rationale for Apple after noticing that Berkshire Hathaway (BRK.A -0.63%) and (BRK.B -0.82%) sold a substantial portion of their shares. However, these sales are more likely the result of Berkshire Hathaway's specific situation than a reflection of Apple's investment potential.
Apple and Berkshire Hathaway
Over the past few decades, Warren Buffett's reputation for investment insight has inspired many investors to replicate his moves. These investors eagerly anticipate the company's 13F filings, which disclose Berkshire Hathaway's investment activities for the previous quarter.
One such move that generated significant discussion was Berkshire's massive sale of Apple stock. In Q3 2023, Berkshire held approximately 916 million Apple shares, with the stock accounting for over 49% of Berkshire Hathaway's equity portfolio.
However, Berkshire initiated its Apple sell-off towards the end of last year, with the pace of stock disposals accelerating in 2024. By Q3 2024, its position had shrunk to 300 million shares, now representing around 25% of its holdings.
Investors' perspective
Unfortunately, some investors tend to misconstrue Berkshire Hathaway's role in the market. As a colossal investment firm, Berkshire doesn't evaluate the investing landscape in the same way that a small investor might. Due to its sheer size, it needs to be mindful of how its purchases and sales could impact individual stock prices.
As of Q3 2024, Berkshire had approximately $272 billion in stock and a record $325 billion in liquidity. This means that Berkshire's cash reserves exceed the market capitalization of all but 25 publicly traded companies.
While this brings considerable power, it also complicates investing for Berkshire. For instance, allocating a large portion of its liquidity to a single stock could potentially buy out most existing companies. Additionally, Berkshire's size significantly influences stock prices. Buying or selling even 10 million shares of a company with a daily trading volume of five million shares can materially affect the stock price.
In Berkshire's case, it must conduct transactions using various small orders to minimize its impact on the share price. Furthermore, Apple's valuation may have influenced its decision-making. Berkshire accumulated the majority of its shares between 2016 and 2018, when Apple had a relatively low P/E ratio of 15. With considerable growth potential, this seemed like a wise move for Buffett and his team.
Now, Apple's P/E ratio is 42, making its stock significantly more expensive. In light of this, it makes sense for Berkshire to reduce its exposure and build liquidity, hoping to find another growth company in a similar position as Apple in 2016.
Interpreting Berkshire Hathaway's Apple sales
In essence, Berkshire Hathaway's Apple stock sale should not raise concerns for the average investor. While the sale of over two-thirds of its Apple holdings might not look promising for the company and its shareholders at first glance, investors have to consider Berkshire Hathaway's unique market position ahead of jumping to conclusions.
Berkshire bought Apple shares cheaply in the past, which tied it to a large, undiversified investment. Although the average investor can easily sell or exit similar situations, Berkshire needed to sell shares in smaller batches over an extended period to minimize its impact on Apple.
This sale does not pose a threat to Apple shareholders, either. Despite Berkshire Hathaway reducing its stake in Apple, it still holds 25% of its equity holdings in the company, an indication of its unfaltering confidence in the company.
By making these sales, Berkshire reaps profits and diversifies its portfolio. The profit-making and portfolio diversification enable Berkshire to benefit from expanded investment opportunities that it lacked when heavily invested in a single stock. Therefore, while Berkshire selling large portions of Apple might be beneficial for the firm, adopting this strategy might not be necessary for the average investor.
Despite Berkshire Hathaway's significant selling of Apple shares, which represented over 49% of its equity portfolio, investors should not conclude that it implies a lack of confidence in Apple's investment potential. Berkshire's unique market position and the need to minimize its impact on Apple's share price necessitated selling shares in smaller batches over time.
Investors interested in money management and finance might want to consider Berkshire Hathaway's selling strategy as a case study in portfolio diversification. By selling and reaping profits from Apple shares, Berkshire was able to expand its investment opportunities, potentially leading to better financial returns in the future.
