Warren Buffett is one of the most respected investors in the world. And there’s a good reason for that. With nearly 70 years of investing in the public eye, he has delivered incredible returns for anyone who wants to invest alongside him. He recently saw the value of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) exceeding $1 trillion. It has come a long way since the $22 million company that Buffett took over in 1965, thanks in large part to Buffett’s investing prowess.
Today, Buffett and his fellow investment managers oversee approximately $600 billion in investable assets for Berkshire Hathaway shareholders. And when Buffett makes a move into Berkshire’s portfolio, the entire investment world pays attention.
The Oracle of Omaha’s latest move is to sell some of Berkshire’s investments in Bank of America (NYSE: BAC). Bank stocks were once Berkshire’s second-largest holding Apple (NASDAQ: AAPL)but Buffett will sell it and probably buy this high-yield investment instead.
Buffett takes money out of the bank
Investors typically have to wait for institutional investors like Berkshire Hathaway to file Form 13F with the Securities and Exchange Commission (SEC) to see what changes they’ve made to their portfolios over the past quarter. But since Berkshire Hathaway owns more than 10% of Bank of America’s outstanding shares, it is required to report any changes in ownership within three business days. For example, we know that Buffett sold more than $9.6 billion worth of Bank of America shares in the third quarter, and another $140 million in the first two days of October.
Bank of America is far from the only company that Buffett is cutting back on. He sold more than half of Berkshire’s stake in Apple between the fourth quarter of 2023 and the second quarter of this year. While Apple remains Berkshire’s largest holding, its second-quarter revenue represents the largest in Berkshire’s history.
In fact, as of the fourth quarter of 2022, Buffett has been a net seller of stocks for seven quarters in a row. Given the size of its share sales at Bank of America, Berkshire is likely to confirm an eighth straight quarter when it reports earnings next month.
There’s a simple explanation for why Buffett felt compelled to sell significant chunks of Berkshire’s biggest stocks: taxes and valuations.
Buffett expects the current tax rate on corporate profits to increase after the current tax laws expire in 2025. If nothing happens, they could return to 35% from the current rate of 21%. Kamala Harris has proposed a 28% corporate tax rate. Donald Trump would likely push for a continuation of the 21% tariff imposed under his previous administration. But given the current government deficit, Buffett sees the current pace as unsustainable.
What Buffett hasn’t explicitly said, however, is that selling now to save on taxes later only makes sense if he also feels that the stocks he’s selling are trading near or above their intrinsic value. Buffett wouldn’t sell stocks far below their true value just to save taxes. And given his lack of investments in other companies, it’s clear that Buffett doesn’t see much of an opportunity for Berkshire Hathaway’s funds to be invested in at the moment.
But Buffett has consistently taken the opportunity to buy one high-yield investment, and that’s probably where most of the money from Berkshire’s stock sales goes.
The ultra-safe, high-yield investment on Berkshire’s balance sheet
Over the past two years, Buffett has piled money into U.S. Treasury bonds. At the end of the second quarter, Berkshire Hathaway held $238.7 billion in U.S. Treasury bonds. It also had about $38.2 billion in cash. That total of $276.9 billion is an increase from $109 billion at the end of Q3 2022.
These short-term government bonds mature within twelve months. Buffett prefers short-term government bonds because they offer the highest level of safety. They are better insulated from interest rate risk, which could cause the value of the bonds to decline, resulting in a loss in value if Buffett needs liquidity.
Over the past two years, Buffett has reaped the dual benefits of safety and returns as short-term bonds earn more interest than long-term bonds. That’s because many expect long-term interest rates to fall as the Fed cuts rates and aims to keep them stable. But Buffett has said he would like to keep a large portion of Berkshire’s assets in government bonds, even if they don’t pay nearly as much.
The reason why Buffett is massively choosing the safe investment is not the high return he can achieve in the current market. The reason is simple: he doesn’t think there is a more effective use of the money.
While that may sound like a stark warning to most investors, the truth only applies to the part of the market in which Berkshire can operate. The universe of stocks that Buffett could potentially buy is limited to the largest companies in the world. This makes it more difficult to achieve market-based returns. “I wouldn’t like to be managing $10 billion right now,” Buffett said at Berkshire’s shareholder meeting in May. “I think Charlie or I can make $10 million with a high return,” he noted.
That suggests he is not recommending the average investor put their money in government bonds. There are plenty of opportunities for small investors with “just” $10 million or less. But if you need a place to put your money while you look for it, short-term government bonds still offer attractive returns for now.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions at Apple. The Motley Fool holds positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett sells Bank of America stock and buys this high-yield investment instead. originally published by The Motley Fool
