Berkshire Hathaway CEO Warren Buffett and his successor Greg Abel appear to be skeptical about U.S. stocks' valuation. The duo has stripped billions from Berkshire’s vital stock market investments from the first quarter of 2022 through the second quarter of 2024. This led the company’s cash reserves to amplify by 161% to $276.9 billion. The trend has continued into the third quarter.
According to SEC filings, Berkshire has sold 150.1 million shares of Bank of America for $6.2 billion since July 17, reducing its stake in the major bank by 14.5%. Despite this reduction, Berkshire remains the largest shareholder in Bank of America, holding an 11.4% stake valued at approximately $36 billion. The conglomerate's $90 billion in stock sales during the first half of 2024, along with additional substantial sales this year, has raised concerns among some investors.
Speculation about Warren Buffett’s reasons for selling many of his key stock holdings has intensified. Analysts suggest various motivations, including concerns over high valuations, preparing for a major acquisition, or bracing for a potential recession or market downturn.
Haruki Toyama, portfolio manager and head of the Mid and Large Cap Team at Madison Investments, does not interpret Buffett’s stock sales as a direct signal of a bearish market. “Buffett’s history shows that he only explicitly comments on stock valuations occasionally, perhaps once every couple of decades,” Toyama, a long-time holder of Berkshire shares, told Fortune. “He hasn't made such statements recently, so I don’t believe he views the market as extremely overvalued or undervalued.”
Toyama acknowledges, however, that Berkshire’s efforts to amass cash should not be overlooked. This could suggest that Buffett and his team perceive stocks as moderately overvalued. Indeed, the “Buffett indicator,” which compares U.S. GDP to the total stock market capitalization to assess stock value, currently stands more than two standard deviations above its historical average, typically indicating high valuations. Buffett himself referred to this indicator in 2001 as “probably the best single measure of where valuations stand at any given moment.”
Historically, when Berkshire has significantly increased its cash reserves, it has often been a precursor to challenging times. “The last time Berkshire held this much cash relative to its book value was before the financial crisis,” Toyama pointed out. “This could imply that Buffett is being more cautious about risk.”
While Toyama believes that stocks overall seem “on the expensive side,” he does not think Buffett’s sale of Bank of America shares necessarily signals an imminent market crash. Instead, Buffett and his team are likely assessing their investments on an individual basis, guided by disciplined capital allocation strategies.
“He’s just trimming as he looks at his stocks and feels they’re expensive, and he’s not necessarily feeling compelled to reinvest,” Toyama said. “Is it a market call? No, but I think implicitly, he’s finding less attractive risk-rewards out there. So you can make the case that he thinks that there aren’t that many great opportunities out there.”
Understanding the reasons behind Berkshire Hathaway’s recent market moves can be challenging. However, Haruki Toyama has offered some insights into why Bank of America—now Berkshire’s third-largest holding after the recent sale, trailing only Apple and American Express—has been targeted for divestment.
Firstly, with market valuations at high levels, as indicated by the Buffett indicator, Buffett might be managing risk by securing profits. “Bank of America stock has performed well since his initial purchase,” Toyama noted.
Berkshire first invested in Bank of America in the second quarter of 2007, just before the Global Financial Crisis, a timing that proved less than ideal. Buffett and his team paid $50.61 per share initially, while the stock currently trades around $40 per share. Despite this, Buffett's decision to support Bank of America during the crisis turned his initial investment into a profitable one. Berkshire purchased hundreds of millions of additional shares as the bank’s price dropped, including a significant acquisition of 679 million shares when the stock was valued at $24.27.
In 2011, while the banking sector was still recovering from the subprime mortgage crisis, Buffett invested $5 billion in Bank of America’s preferred shares and warrants. He anticipated that the bank would not need additional capital to cover its mortgage exposure, and the investment would quickly yield returns. Buffett converted his warrants in 2017, making Berkshire the largest shareholder in Bank of America for the first time. At that point, Buffett suggested that it would be a “long time” before selling. Berkshire's cost basis for its Bank of America holdings is now around $14.15 per share, reflecting significant profits.
Currently, Buffett’s decision to sell may indicate that he believes the future return on this investment has diminished or that new opportunities have arisen. Toyama also suggests that rising “tail risks” for banks might be a factor in Buffett’s decision.
Toyama observed that Buffett has been reducing risk in his portfolio in recent years following strong market performance. Berkshire sold its entire stake in Taiwan Semiconductor in 2023 and reduced its holding in Chinese EV manufacturer BYD this year. In the first half of 2024 alone, Berkshire sold $90 billion worth of stocks, including a substantial reduction in its Apple stake. “My guess is that Buffett is considering similar risks with banks,” Toyama said.
Rising interest rates have made banks less attractive relative to risk-free assets like Treasuries, which now yield about 5%, compared to nearly zero in the past. Buffett has also expressed dissatisfaction with how some banks have managed their securities portfolios, especially after the collapse of several regional banks last year due to their investments in long-dated Treasury securities in a rising rate environment.
Although Buffett has not specifically criticized Bank of America, Toyama believes that Buffett’s general disappointment with the banking sector’s risk management practices might be influencing his decision. Recently, Berkshire sold other bank stocks, including its entire stake in Wells Fargo in 2021 and a 21% reduction in Capital One shares in the second quarter, realizing substantial profits.
While some investors might worry that Berkshire’s stock sales signal an impending market crash, Toyama does not view this as the primary message. He argues that if Buffett were concerned about a market crash or overvaluation, financial stocks would not be the first to sell, especially since Bank of America trades at just 14.2 times earnings, significantly lower than the 24 times earnings for the broader S&P 500.
