Berkshire Hathaway stock went on a selling spree, substantially reducing some major positions and completely selling six. What’s going through Buffett’s head? What is the reason behind this move?
Hello everyone, and welcome back to investing with Antoaneta. Warren Buffett has been making some interesting moves lately, and, you know me – I like keeping a close eye on what the big players are doing.
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So, in today’s blog, we are going to take a look at the latest changes to Berkshire Hathaway’s positions.
Berkshire Hathaway stock sold and reduced 11 positions. Here’s why:
Okay, well, “selling spree” might be a bit too strong of a word here, but they are definitely doing a lot more selling than buying.
Before we get into the logic behind all of this, let’s have a look at the portfolio changes.
Berkshire has sold or reduced 11 stocks and bought or added only 9.
- Pfizer inc. (PFE) – 100% (pharma)
- Barric Gold Corp (GOLD) – 100% (gold mining)
- J.P. Morgan (JPM) – 100% (banking)
- PN Financial (PNC) – 100% (banking)
- M&T Bank (MTB) – 100% (banking)
- USbancorp (USB) – 0.62% (banking)
- Apple Inc. (AAPL) – 6.05%
- General Motors (GM) – 9.38%
- Liberty LILAC Group C (LILAK) – 10.22%
- Suncor Energy (SU) – 27.78%
- Wells Fargo (WFC) – 58.84% (banking)
And, from a value investor’s point of view, these moves are already looking strange. But this isn’t just any investor we’re talking about here. Buffett is known for his tendency of holding onto stocks for as long as possible. And he’s also someone who has held many bank stocks in the past. Yet, he sold/reduced his J.P. Morgan, Wells Fargo, PNC, and M&T Bancorp massively.
What would make a value investor who claims that his “favorite holding period [for stocks] is forever” suddenly sell out of so many major positions?
Well, let’s take a look at the buys. Maybe they could help shed some light on this situation.
Bought or added:
- Verizon Communications (VZ) + 151.45% (telecom)
- T-Mobile US Inc. (TMUS) + 117.23% (telecom)
- Kroger (KR) + 34.25%
- Merck & Co. (MRK) + 28.10% (pharma)
- Marsh & McLennan (MMC) + 26.77% (insurance)
- AbbVie Inc. (ABBV) + 20.07% (pharma)
- Bristol-Myers Squibb Co. (BMY) + 11.23% (pharma)
- Chevron Corp. (CVX) + 9.55%
- Restoration Hardware (RH) + 1.42%
So what we’re seeing here is a transition away from banking into pharma and telecommunications.
Even though Buffett himself hasn’t openly stated why he’s doing this, we can piece together some of his reasoning if we look at the bigger picture.
The economic climate
The economy isn’t doing so well; we know that for a fact.
- Lower production – GDP is lower than what we had for the last two quarters of 2019 and Q1 of 2020.
- Lower earnings – The S&P 500 earnings are down-trending.
- Business closures – Then, you also have all of the businesses that had to close down during the lockdowns. And, a lot of them were forced to transition from temporary to permanent closures.
- Higher stock prices – while all of this is going on, Stock prices are going up! The S&P 500’s PE ratio is over 40 (more than double the historical average) and Shiller is over 35.
This indicates that, even though the economy is doing poorly, investors are optimistic about the future of businesses.
Now, as most of you know, Buffett’s investing style is based on Benjamin Graham’s approach. Here’s one of Graham famous quotes about buying stocks:
“Buy when people, including experts, are pessimistic, and sell when they are actively optimistic.”
And, just like that, it’s all starting to make sense.
You’ve got an unfavorable economic climate, complete with low interest rates and tons of “free” money (which just makes the situation even worse). Also got a lot of investors worried about the future of the economy. I’ve made a couple of blogs about this not too long ago (the links are in the description below as usual), but, long story short, people are worried that a new “Great Depression” might be coming.
And what happened during the last Great Depression? Most banks failed, that’s what. As a matter of fact, Buffett himself had to bail out Goldman Sachs last time.
While we’re on the subject of crises and crashes, it’s also worth mentioning that market crashes usually happen about once every ten years on average. Sometimes they might take a bit longer than ten years, sometimes less, but the “historic” average is once every ten years.
The last time we had a real crash was back in 2008. And, no, the 30ish percent of 2020 don’t qualify because things bounced back before the situation came out of hand.
We have a health crisis, a shaky economy, overvalued stocks, and a lot of digitalization. All of these are potentially dangerous for banks but not so bad for telecommunications and pharma. And, so Buffett is moving away from banks and transitioning to telecoms and pharma. Mystery solved. Well, kind of. It’s still mostly speculation on my part, but it’s interesting (and potentially important) either way.
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Recommended for further reading:
- Stock Market Investing For Beginners: The Investment Guide
- Think and Grow Rich
- The Wealthy Barber
- Learn how to make more money and transform your life
- The Barefoot Investor: The Only Money Guide You’ll Ever Need