Buffet Continuously Liquidates His Preferred Equity Due to an Unexpected Justification
Warren Buffet is a strong supporter of long-term investment. Many of his biggest investments have been in his portfolio for several decades. Even though Buffet and his team regularly adjust the publicly traded portfolio at Berkshire Hathaway, there's much less turnover compared to most professionally managed funds. Whenever Buffet and company start to heavily sell one of Berkshire's long-term investments, investors should take notice.
This stock continues to be Berkshire's largest long-term investment
In the beginning of 2016, Buffet and his investment team started purchasing shares of Apple (AAPL 0.44%). Soon enough, Apple became Berkshire's largest public holding, with a worth of approximately $100 billion.
What is it about Apple that Buffet and Berkshire are so fond of? Earlier this year, Buffet compared Apple to two other long-term investments in Berkshire's portfolio: Coca-Cola and American Express:
I can't really think of a company like American Express that has a position and a credit card that is incredibly strong. It has grown considerably stronger over the past 20 years for numerous reasons. That's why we own American Express, which is an outstanding business. We own Coca-Cola, which is an outstanding business. And we own Apple, which is an even better business, and we will continue to own Apple, American Express, and Coca-Cola, unless something truly extraordinary happens.
It's quite remarkable that Buffet not only compared Apple to Coca-Cola and American Express -- blue chip stocks that have been in his portfolio for decades -- but he also declared that Apple's business model was even better than those iconic businesses.
When discussing American Express, he focused on the company's immense brand value. American Express cardholders often remain loyal to the company for substantial portions of their life, and spend disproportionately more than other card providers like Visa and Mastercard. Buffet's comments about Apple show the same enthusiasm for its brand power.
"If you're an Apple user and someone offers you $10,000, but the only condition is that they'll take away your iPhone and you'll never be able to buy another, you won't accept it," Buffet said on CNBC last year.
But if Buffet is such a fan of Apple, why has Berkshire been consistently reducing its Apple stake? Last quarter alone, it nearly halved its Apple position.
It's essential to recognize: Buffet remains a big supporter of Apple shares
Even after significantly reducing its Apple stake, the company remains Berkshire's largest position in its publicly traded portfolio, with a value of approximately $85 billion. Its next largest position, American Express, is worth just $35 billion.
Berkshire still believes in the company. Otherwise, it would have reduced the position even further. The true reason behind the selling is a combination of factors, not all of which reflect poorly on Apple in particular.
For instance, Buffet has expressed the belief that capital gains taxes will increase in the future. By taking the gains now, he theoretically reduces his potential tax burden in the future.
Perhaps even more important, however, is Buffet's belief that equity markets overall are overvalued. He recently stated that he "sees few cheap, high-quality companies in which to invest" at the moment. Reducing the Apple position may simply reflect an increased caution about markets in general.
Buffet still supports Apple as a company. And he still believes the business is worth the No. 1 position in Berkshire's portfolio. But Apple shares are no longer the bargain they once were.
And Buffet's caution about markets overall should make all investors think twice before making any single business such a significant portion of their portfolio. Right now, Buffet is reducing many of his positions, resulting in a record-breaking cash pile for Berkshire. He knows that if markets fall, Apple's value will likely also decline, even if it remains attractive as a business.
Buffet's decision to reduce Berkshire's Apple position doesn't diminish his support for the company's long-term potential in the finance and investing world. In fact, Apple remains Berkshire's largest investment, with a value of approximately $85 billion.
Investors should remember that Buffet's selling of Apple shares is largely influenced by his belief in potential capital gains taxes increases and an overall overvalued equity market, not a lack of confidence in Apple's business model.
