Buffett Is Selling! Should You Too?

Today we're going to talk about Warren Buffett's decision to sell his Apple holding, what it means for investors, whether you should be worried about the current market condition right now, and what I'm doing with my portfolio. So without further ado, let's get started. All right, so as you can see on screen right now, I prepared a couple of different screenshots, charts, and comments, and excerpts from various articles to structure the video a little bit. And I'm going to start by just showing you the headline that the Financial Times used for one of their articles, and they titled, Warren Buffett slashes Apple stake as he boosts cash-to-record high in M. We are going to take a look at the actual numbers in just a second. But let me just say that Berkshire Hathaway basically reported their quarterly results on Friday, I think it was, and the Apple decision, so the decision to sell, or I should say to continue to trim the Apple position, certainly made the biggest headlines all around the world. So in the Financial Times article, they write, in just over a year, Buffett has ditched almost two-thirds of his stake in the technology company, which at its peak in 2023 accounted for $178 billion of the company's stock portfolio. And then in the next paragraph, they basically describe that this decision should be surprising to some extent, because not too long ago in one of his Berkshire Hathaway letters, letters to shareholders, I think it was the 2022 letter, yeah, that's right, Buffett was basically describing Apple as one of his core holdings in the overall Berkshire portfolio, not just the stock portfolio. And in the letter, I think he also described that he believes Apple will be a long-term position for Berkshire Hathaway, and that he has no intention of ever significantly selling that stake. So it is definitely surprising. And then they also write in the article, and here they are quoting him, and this is with regard to the cash position that Buffett was building up already back then. So Buffett said, but I don't mind at all, under current conditions, building the cash position. He added, I think when I look at the alternative of what's available in the equity markets, and I look at the composition of what's going on in the world, we find it quite attractive. What I think is important to be aware of is when Buffett talks about his alternatives, obviously he is talking about a different opportunity set than the, yeah, opportunity set available to you. Because Buffett, and I think he has expressed this multiple times in the past, he acknowledges that due to the size of Berkshire Hathaway today, his investing universe is extremely limited. Maybe you can choose from 50 companies. If you want to be a little less strict, you could argue maybe up to 100. But if you then add a quality filter on top of that, I think there aren't really that many investments left for Buffett to make. Clearly, just because he doesn't see alternatives, this doesn't mean that the opportunity set is equally unattractive for you as an individual investor who can invest all across the world in companies of different market caps, across different sectors, and so on and so forth. We'll get to this a little later. In the Financial Times article, we also see this chart here right now, which basically shows how the cash position of Berkshire Hathaway has developed over time. We can see that we are at a record high, at least in absolute numbers. I've actually seen another chart that I haven't prepared and included in my preparation here that showed the cash position of Berkshire Hathaway relative to its market cap. And if we look at this chart, maybe I can find it and then insert it in the video in post-production. Basically, this shows that maybe we are not at an all-time high in terms of the cash position of Berkshire Hathaway on a relative basis, at least. And what else we can see is that basically the cash position reached, I think it's around 325 billion US dollars right now, which is absolutely massive. If you just consider which companies you could buy with that cash war chest, so to speak, Netflix comes to mind, McDonald's certainly, and some other well-known companies. So it's definitely a lot of money. And just to illustrate how much money it actually is, I also included this tweet here from Zero Hedge. He wrote, Buffett's cash hits a record of, as I just said, 325 billion US dollars, up around 50 billion this quarter, and up, and I think that's actually the significant part here, up 170 billion, like roughly 170 billion US dollars in the last nine months. So the first nine months of 2024, which is an increase of almost 100%. So this is definitely showing in this graph, and also the graph I was showing you from the Financial Times. Here we can actually see a snapshot from the balance sheet. I was actually reading a tweet from Christopher Plumestrand, who is incredibly familiar with Berkshire as a business. And he was actually pointing out that some of the headline numbers, the 325 billion US dollars, that this figure is actually a bit off. He was explaining why, because I don't remember the details of it, but basically you have to offset the position showing up on the asset side with another accounting item that shows up on the liability side. So in reality, we are probably looking at a cash war chest of around 310 billion US dollars. But to be fair, it doesn't really change the overall narrative that is portrayed here with regard to how Buffett probably sees the current market environment. All right, what else do we have here? This is actually a tweet that is sort of summarizing what Buffett did in 2024. And if someone would have asked you to make a prediction with regard to how Buffett is going to position himself in 2024, chances are you would have not predicted some of the major decisions that you can see on screen right now. Then another thing I wanted to point out, and that I find quite interesting, is that Buffett's cash position is now larger than the overall value of his equity portfolio. So basically, the market cap of all of his investments in publicly traded companies combined is smaller than his cash position. So that's definitely something that should make you think. Let me put it this way. So let me show you another tweet here from Tiho Burkan, which I definitely respect a lot. And this sort of goes in the direction that I was hinting at. He wrote, Buffett is getting as bearish as he possibly gets. Selling stakes, trimming stock positions, raising cash, avoiding buybacks. That was another part of the Berkshire Hathaway quarterly result that Buffett actually stopped Berkshire Hathaway's buyback initiative, which sort of gives investors an idea that Berkshire Hathaway is maybe not attractively valued, at least in Buffett's view. He's getting ready for a bear market. I'm not sure if I necessarily agree with that take, but we'll get to this a little later. All right, then just to wrap up the Berkshire Hathaway part, and then we'll talk about the broader market environment, I wanted to show you another chart from the Financial Times article. This one shows the interest income of Berkshire Hathaway over time. And obviously, it shouldn't come as a surprise that as Buffett's cash position increases, and as we are obviously right now in a higher interest rate environment than we were in the 2010s, of course, this cash position is going to translate into significant interest income. And I was actually doing some math here. So I was assuming that if Warren Buffett's Berkshire Hathaway invested the $325 billion US dollars in one-year treasury bills, which as of today are yielding around 4.2%, this would basically translate into $13.4 billion US dollars in interest income annually, or pretty much $1 billion a little more, $1 billion US dollars in monthly interest income, which is pretty mind-blowing if you think about that. Okay, now, I think there are two different takes with regard to what we make of these headlines, of the news that Warren Buffett is continuing to actively increase his cash position. And I want to basically contrast two different perceptions here. So the first one here, that's a tweet from Hilliard Macbeth. And he wrote, Warren Buffett is doing market timing. It seems likely that he's expecting a major correction. Berkshire had $320 billion in cash, a total of $1.1 trillion in assets at the end of September. And I think maybe the tweet by T.H. O'Brien goes in the same direction. I think you can contrast it with this take by Sam Hollanders, which, by the way, I also tend to agree with. So he wrote, I don't think Warren Buffett is building his cash position. He doesn't care what the market does. I don't think he's preparing for a crash. He's selling stocks he thinks are overvalued. The result is the same, but the motive is important. So let me just explain to you why I think Sam is right here. And obviously, we don't know. We would have to talk to Buffett and ask him what his motive actually is here. But Buffett has definitely publicly said on multiple occasions that he thinks trying to play the market timing game is a game only fools should play because you cannot win in it. You cannot win in it sustainably, at least. So I would agree with Sam that I think Buffett is selling his Apple position specifically because he doesn't believe that the investment at the current price is going to yield promising returns. So this is something that I actually addressed in my last video, in which I talked about the quality bubble that is quietly forming. And I think I included Apple as one of the names that I think is overvalued in it. The lack of growth and the sheer size of Apple definitely makes it hard to believe that Apple is going to generate like 15% plus returns for shareholders going forward. I think chances are growth is going to be relatively low, both in the mid, but also in the long term, just because Apple has already become so big. It seems like Apple is not going to play a significant role in the AI race. And so I don't know if Apple ever experienced a compression of its valuation multiple. Investors are certainly in for a rough ride. And as Apple, as a slow growing company, if we just look at the past couple of quarters, is trading at a multiple, like I think a price to earnings multiple of around 35, might be a little lower. I'm not exactly sure. Chances are that if that multiple ever comes down to maybe a more appropriate multiple for a slow growing high quality company of maybe 20 times, well, that's a major headwind that is hard to overcome, especially if the business is not growing or growing at low single digit, maybe high single digit rates going forward over the mid and long term. So the title of the video is that Buffett is selling and trying to raise his cash position. What should you do? Should you do the same? I certainly come across a ton of different tweets again in my Twitter feed showing people that are advocating actively raising your cash position. And I think that's a bad, bad idea. Like what I will say is I get behind the sentiment that these guys are feeling. Some of the investors, as I said, T.O. Birkhorn. Another one is Thomas Tuer. I think he wrote a blog post on this subject that he for the first time in quite some time is actively raising cash and I respect him a lot. So I get the sentiment that they are sensing that we are definitely in one of the later innings of call it the market cycle. And arguably, and this is what I try to visualize in this visualization here. This is when things get risky in the world of business. When everyone is very confident. I'm going to talk about a couple of different signals that I think are indicating, as I said, that we are probably in one of the later innings of the market cycle. So as this one here shows, when the perceived risk by the majority of investors is relatively low, the actual risk tends to be very high. So this is what I write right here. The riskiest time to invest is when the market looks great and investors' confidence about the future is at its greatest. Counterintuitively, the greatest time to invest is usually when the market looks riskiest and when no one actually wants to touch stocks. And this is not an environment we are seeing right now. Let me just show you this tweet here again from Q Birkern and he was sharing this chart here that basically shows that the expectations among US households when it comes to the performance of stocks is pretty much at an all-time high. And usually this is a signal that probably the returns going forward are not going to be that great. I think there are similar studies that show when US households have a higher exposure to stocks in terms of their overall asset allocation, this is usually when the expected future returns are going to be the lowest. And when the exposure to stocks is the lowest, well, then going forward, the returns are usually above average. And I recently actually wrote an article on this, an article that I titled, Why I'm Not Raising Cash Right Now. And I sort of addressed this a little bit already. And in it, I discussed a couple of different signals that I think investors may be receiving right now in terms of where we are in the market cycle. And that sort of signal or indicate that we are probably closer to a top of the market than a bottom. And I mentioned a couple of ones. So first of all, highly stretched valuations for certain stocks. You can definitely name some retail favorites here right now, just as Palantir or HIMSS, like ticker HIMSS. But also some quality names, as I discussed in my last video. I think companies like Costco or Apple or Sherwin-Williams are certainly trading at wide-stretched valuations. You see widespread hurting behavior in certain names. And I included a tweet here from Antonio Linares, who believes, well, these stocks have 100x potential. I think tweets going viral talking about 10x, 100x stocks are usually more popular or tend to go viral when, well, everyone is bullish and no one believes things can go wrong. Then another signal that I mentioned here is an influx of new or inexperienced investors asking for stock tips or excessive leverage. And here I would like to know what you think. Have any people in your social circle that usually don't talk about stocks and investing in general asked you about your opinion about the current opportunity, maybe in gold, maybe in a specific asset class, maybe with regard to particular stocks? And then we also, and I discussed this in previous videos too, we're definitely trading at quite elevated prices when we look at the broader market. So let's try to come to a conclusion here. First of all, what I will say with regard to the high market valuation is that I think there are two flaws when it comes to comparing the current multiple of the S&P to its historical average. To be fair, if we look at the Shiller PE multiple, let's just go back to my article, we are right now trading at a multiple of 36 and I think the historical average is closer to 16x. So if you look at it this way, this certainly seems like we are pretty much close to a peak probably. However, I think it's flawed for two reasons. First of all, I believe that on average US companies, so now we're talking about the S&P 500, are better businesses today. They are more diversified. They are globally, so geographically more diversified. They tend to be stickier businesses because many of these businesses in an internet era run recurring revenue models. They tend to be businesses that are more capital light, which reduces risk. Yeah, so I believe they are just better businesses overall. And then second of all, many of these businesses are, especially in the US, very tech focused. They are reinvesting primarily through the income statement, meaning they are reinvesting by investing heavily in research and development and also marketing, depending on the business. And these things lead to depressed earnings. But if you would look at these individual businesses on a steady state earning basis, meaning you would only deduct maintenance investments and not growth investments, they might not look as expensive as they do right now if you just look at the multiples displayed on major stock research platforms. So what am I doing? I titled my article that I was referencing earlier, Why I'm Not Raising Cash Right Now. So as I try to express in this video, I feel like trying to play the market timing game is going to be a losing strategy. And I think what investors should actually do is to focus on the micro and not the macro. What do I mean by micro? Well, look at the companies in your portfolio. What kind of expected returns do you expect from these businesses going forward? And obviously, this depends on two factors. First of all, the state of the businesses. Are they as strong as they were when you initially made that investment? Are they maybe even better businesses or has their mode deteriorated? Are they still run by capable leaders? Are they still relatively debt free? Are they still growing? Are they still seeing opportunities to increase their profitability? And then maybe most importantly, are they still trading at a valuation, regardless of how the business is doing, that will allow you to earn a satisfying return? And how high that return is that you consider satisfying obviously is very subjective. For me, it's a return of at least 10%. So that would be the absolute bare minimum. I want my investments to earn at least 10%, assuming a ton of conservative estimates. And if I look at my portfolio right now, consisting of nine companies, I don't think any of the stocks are trading at a level where I would strongly believe that the returns are going to be worse going forward. I have a collection of really high quality businesses that I expect to earn higher returns because they are going to grow their earnings probably at a rate of above 10%. Most of them at least, probably at 15% or even more. And I don't think they are trading at a valuation that will, or that has a lot of exposure to a multiple contraction risk. Okay, that was it for today. This was sort of a different style of video. So let me know how you liked it. And I'll talk to you in one of my next videos. Take care.