Currently, the market is experiencing a surge in bearish sentiment, especially after Berkshire Hathaway announced changes in its second-quarter holdings over the weekend. This has left investors feeling anxious, even panicked. Remember when Berkshire reduced its Apple holdings by 13% in the first quarter? At the time, Warren Buffett told us it was purely for tax reasons and not because he had a negative view on Apple. He even emphasized that the iPhone is the greatest product ever and that Apple is an even better company than his long-term investments in American Express and Coca-Cola!
Who would have thought that despite what Warren Buffett said, in the second quarter, Berkshire continued to sell Apple shares? Moreover, they expanded their sales, directly selling off 49.4% of their Apple holdings, which is approximately $75.5 billion worth of stock! Is this a case of saying one thing and doing another, or are tax considerations really that significant? There has been no response on this matter yet. While Berkshire’s largest holding was significantly sold off, its second-largest holding, Bank of America, also saw reductions starting in July, with continuous sales over 12 days amounting to 90 million shares, roughly worth $3.8 billion!
With these major sell-offs in its top two holdings, Berkshire’s cash reserves have surged to an all-time high of $276.94 billion. The most straightforward explanation is that holding large amounts of cash is a strategy for when we face a bear market correction, preparing for a significant downturn.
So, when Berkshire sells stocks to liquidate and holds massive cash reserves, it can be interpreted as Warren Buffett worrying about a potential U.S. stock market crash! A more accurate speculation might be that Apple, as an end-consumer electronics product company, is not just facing tax issues but might be suffering due to concerns about an impending U.S. economic recession. This could mean consumers will tighten their belts, leading to poor sales of consumer electronics. Therefore, Buffett’s actions also echo what was discussed in last Saturday’s article: nothing is scarier than an economic recession, and Buffett is preparing for one!
Buffett’s large-scale stock sales align with his past operating principles and logic. The most famous example is the Buffett Indicator, which is the ratio of the total stock market value to GDP. This ratio has surged above 180% again in recent periods, indicating that the market is highly overvalued! The last time it exceeded 180%, it even soared to 200% before eventually crashing in the bear market of 2022.
Therefore, returning to the 180% overheat level this time makes Buffett’s massive stock sales seem reasonable. The reason for the overvaluation, as I’ve mentioned before, is that the profit returns from AI haven’t kept pace with the skyrocketing stock prices. To maintain the same P/E ratio, either profits need to jump quickly, or stock prices need to correct downward, right?
Of course, I want to remind everyone of two things. First, Warren Buffett is not always right, just like anyone else. Don’t forget he sold TSMC ADR at around $72, which later soared to a high of $193 this year, meaning Buffett missed out on at least $6 billion in profit!
The second point is about the Buffett Indicator. When it previously broke through 180%, it continued to surge to 200% before the upward trend truly ended. This means the indicator doesn’t necessarily crash right after breaking 180%. It can easily become overheated and sluggish! Therefore, it should only be used as a reference to judge whether the stock market is overvalued. If used as a direct basis for selling, it could result in selling too early. It’s essential to also consider other economic data for a more comprehensive analysis!
