Buffet's Predictions Failed to Materialize, Resulting in a $21 Billion Loss for Him within the Past Year
Buffet's Predictions Failed to Materialize, Resulting in a $21 Billion Loss for Him within the Past Year
When influential investor Warren Buffett speaks, Finance World pays attention. Taking up the CEO role at Berkshire Hathaway (BRK.A 1.37%, BRK.B 0.86%) in the mid-60s, he's led to an impressive 5,580,000% growth in Berkshire's Class A shares (BRK.A) by Nov. 7's closing bell.
Beating the average annual total return, including dividends, of the S&P 500 by almost double is a sure-fire way to grab the attention of the investing community. This is why investors eagerly wait for Berkshire's quarterly submitted Form 13F, showing which stocks Buffett and his top advisors, Todd Combs and Ted Weschler, have recently invested or sold in. Following in Buffett's footsteps has long been a successful investment strategy.
However, even the most successful money managers can stumble. Amongst Buffett's great successes, there are occasional blunders, like losing out on billions in potential gains with Walt Disney, misjudging media giant Paramount Global, selling off Berkshire's notable stake in Wells Fargo post-scandal, and suffering a $444 million loss on grocer Tesco.
Warren Buffett's list of successful predictions is remarkably long, but one of his recent predictions has been proven incorrect - thanks to the elections.
The President-Elect's win holds extensive stock market implications
In the early hours of Nov. 6, the AP declared Donald Trump the winner of the presidency. Over the course of Donald Trump's first term in the White House, all three major stock indexes skyrocketed. For example, the growth-driven Nasdaq Composite soared by 138%.
Changes in the White House do bring questions, such as how effectively Trump will deal with America's escalating national debt. While this isn't an immediate concern for the stock market and economy, the escalating federal deficit needs to be resolved sooner rather than later.
On a more specific stock level, concerns about Donald Trump's import tariff plan arise. During his campaign, President-Elect Trump advocated for imposing tariffs on up to 60% on Chinese goods and up to 20% on imports from other nations.
Though tariffs are theoretically intended to enhance the price competitiveness of American-made goods and reduce trade deficits, they can also increase consumer and business prices and strain trade relations between the U.S. and other countries.
Unquestionably, the only certainty of Trump's second term is that the prospect of higher corporate income tax rates, as proposed by Democratic Party Presidential nominee Kamala Harris, is no longer an option. The Tax Cuts and Jobs Act, signed into law during Donald Trump's first term, permanently reduced the corporate income tax rate from 35% to 21%.
Warren Buffett's bet on a higher corporate income tax rate has proven pricey
Despite many of America's leading businesses having the potential to flourish with an all-time-low corporate income tax rate, Trump's election confirmed one of Buffett's forecasts as erroneous. During Berkshire's annual shareholder meeting in May, Buffett predicted that the corporate income tax rate would eventually climb. Selling some of Berkshire's substantial unrealized Apple gains (AAPL 1.88%) tax-advantageously would be favorable for investors. Buffett said, "I don't mind writing that check at all, and I really hope that all of America has done a lot for all of you that it won't bother you that we're doing it. And if I'm doing it at 21% this year, and we're doing it at a higher percentage later, I don't think you'll really mind the fact that we sold some Apple this year."
Unfortunately, Buffett's forecast is flawed as the corporate tax will remain low for at least four more years. During this duration, Apple's stock has shown notable growth, while Buffett and his team have been frequent sellers for the past four quarters. According to Q3 2024 filings and Berkshire's latest quarterly operating report, Buffett sold:
- 10,000,382 shares of Apple in Q4 2023
- 116,191,550 shares of Apple in Q1 2024
- 389,368,450 shares of Apple in Q2 2024
- 100,000,000 shares (est.) of Apple in Q3 2024
Based on Apple's share price on Sept. 30, this would equate to a 300-million share position, a decrease of 100 million shares from Berkshire's June-quarter holdings.
Taking into account the average share price and Apple's closing price by Nov. 7, Buffett's decision to sell for tax purposes has resulted in missing out on close to $21.2 billion in gains.
Certainly, I won't fault Warren Buffet for lessening his involvement with Apple. The company's physical product sales, like the iPhone, have either hit a plateau or declined during the past two years. Additionally, Apple's stock value has it evaluated at a rather bold multiple of 31 times the anticipated earnings per share (EPS) for fiscal 2025 (concluding Sept. 30, 2025).
Nevertheless, the reasoning behind Berkshire Hathaway decreasing its Apple stock by two-thirds during the past year due to tax considerations has, as of now, proven to be quite a costly blunder.
Buffett's tax-motivated Apple sell-off strategy, based on his prediction of an upward corporate income tax rate, has been disproven by Trump's election, resulting in missing out on approximately $21.2 billion in gains.Investors closely monitor Buffett's investment decisions, such as his selling of Apple shares, as it often influences their own investing strategies.