The great conglomerate Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B)run by investing legend Warren Buffett, reported its third-quarter earnings results this weekend. The report is of great interest to shareholders and any market watchers curious about the moves made by Buffett and his team of investment experts during the quarter, as it reflects their overall view of the market.
Another reason investors look to Buffett is because he manages a more than $300 billion stock portfolio that invests in some of the most popular stocks on the market. Although the 13F report detailing Berkshire’s exact stock holdings at the end of the third quarter won’t be available until around November 14, Berkshire’s earnings report offered some clues about Buffett and Berkshire’s investment decisions in the third quarter.
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Based on these clues, we can determine that Berkshire has sold hundreds of millions of shares of its two favorite stocks — Apple(NASDAQ: AAPL) And Bank of America(NYSE: BAC) — and stacked into an ultra-safe asset with a yield of almost 5%.
How do people know that Berkshire sold all these shares if we don’t have a 13F filing? Berkshire’s earnings reports detail the fair value of the company’s five largest holdings in its stock portfolio, given their material impact on the stock portfolio and the business. Then you can find the historical share price on the last day of the quarter and calculate the share amount.
This is where things stood at the end of the second quarter on June 30. (I’m using June 28 stock prices because June 30 was a Sunday.) The numbers are in thousands:
Source: Berkshire’s second quarter earnings report/Wisesheets. Chart by author.
Here are the shares Berkshire owned in each stock as of September 30, using the same calculation:
Stock
Price
Fair value
Shares
Apple
$233.00
$69,900,000
300,000
Bank of America
$39.68
$31,700,000
798,891
Source: Berkshire’s third quarter earnings report/Wisesheets. Chart by author.
Based on these figures, Berkshire reduced its stake in Apple by 25% and Bank of America by 23%. We won’t know at what prices Berkshire sold shares until the 13F comes out.
I think it’s difficult, if not impossible, to think that anything other than Buffett and Berkshire view these stocks – and probably the entire market – as overvalued. Apple now trades for more than 36 times earnings, which isn’t the highest it’s traded at in the last five years, but certainly toward the high end. Bank of America trades for roughly 1.6 times its tangible book value (net worth), which is actually around the five-year average.
These moves follow a pattern of Buffett turning away from stocks. During the first nine months of the year, Berkshire bought about $5.8 billion worth of stock and sold more than $133 billion.
Only twice in history has the market been more expensive than it is today, based on a measure called the Shiller price-to-earnings ratio (P/E), which looks at the value of the S&P 500 index to the average corporate profits of the stocks in the index over the past ten years. This happened right before the DotCom bubble and during the pandemic in 2021-2022. Both times the market experienced a significant correction.
Berkshire didn’t buy much other than short-term U.S. Treasury bonds, another indication that Buffett and Berkshire view the market as overvalued. Berkshire didn’t buy back any shares this quarter, the first time since 2018, and only about $1.5 billion worth of stock.
Instead, the value of Berkshire’s investments in short-term government bonds rose by more than $53 billion in the quarter. Berkshire now has more than $320 billion in short-term government bonds and cash and cash equivalents. Although we do not know the maturity of the government bonds that Berkshire purchased in the quarter – and therefore do not know the yield on those government bonds – we do know that Berkshire has included government bonds with a term of three months or less among its cash and cash equivalents. So I think a good benchmark to look at is six-month government bonds.
Graph of 6-month government bond yields
Six-month government bond yields fell significantly in the third quarter, but averaged almost 5%. Berkshire may have purchased government bonds with different maturities, and we don’t know when he made those purchases, so this is just an estimate.
While I don’t necessarily think Buffett is predicting a meltdown tomorrow, he could be signaling a broader shift in the markets, according to billionaire hedge fund manager David Einhorn. In a recent letter to shareholders, Einhorn said that Buffett has a knack for timing the market and may think it’s time to move to the sidelines to let things cool off.
This does not mean that retail investors should sell their entire portfolio or even sell Apple or Bank of America. Remember, Buffett and Berkshire invest hundreds of billions and countless shareholders depend on them. Their mentality will be very different from that of a private investor. Apple and Bank of America also take up the majority of Berkshire’s portfolio, potentially leaving them feeling overexposed.
But when you see things like this happening, it’s time to ask some tough questions. Am I investing in stocks that are trading at a high valuation and relying on unreasonable growth expectations? Will the stocks in my portfolio be okay if a market correction occurs? Or a recession?
You can answer these questions and determine that no changes need to be made to your portfolio, but it is an exercise that will give you more confidence and make you a better investor.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions at Bank of America. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Billionaire Warren Buffett just sold more than 300 million shares of two favorite stocks and piled them into this ultra-safe asset. Originally published by The Motley Fool
