Warren Buffett is one of the most widely respected investors in the world. And there's a good reason. With nearly 70 years investing in the public eye, he's produced incredible returns for anyone willing to invest alongside him. He recently saw the value of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) surpass $1 trillion. It's come a long way from the $22 million company Buffett took over in 1965, largely on the back of Buffett's investment prowess.
Today Buffett and his fellow investment managers oversee about $600 billion in investable assets for Berkshire Hathaway shareholders. And when Buffett makes a move in Berkshire's portfolio, the entire investing world pays attention.
The Oracle of Omaha's most recent move is to sell off a portion of Berkshire's investment in Bank of America (NYSE: BAC). The bank stock was once Berkshire's second-largest position after Apple (NASDAQ: AAPL), but Buffett is selling it and likely buying this high-yield investment instead.
Image source: The Motley Fool.
Buffett's taking cash out of the bank
Investors typically have to wait until institutional investors like Berkshire Hathaway file form 13F with the Securities and Exchange Commission (SEC) to see what changes they made in their portfolios during the previous quarter. But since Berkshire Hathaway owns more than 10% of Bank of America's outstanding shares, it's required to report any changes in its ownership within three business days. That's how we know Buffett sold over $9.6 billion worth of Bank of America stock during the third quarter and an additional $140 million in the first two days of October.
Bank of America is far from the only company Buffett's been cutting down on. He sold over half of Berkshire's position in Apple between Q4 of 2023 and Q2 of this year. While Apple remains Berkshire's largest position, the sales in Q2 represent the largest in Berkshire's history.
In fact, Buffett's been a net seller of stocks for seven consecutive quarters beginning with Q4 2022. Considering the size of his Bank of America stock sale, Berkshire will likely confirm an eighth-straight quarter when it reports its earnings next month.
There's a simple explanation for why Buffett has felt compelled to sell off significant portions of Berkshire's largest holdings: taxes and valuation.
Buffett expects the current tax rate on corporate earnings to move higher after the current tax laws expire in 2025. They could revert to 35% from the current 21% rate if nothing happens. Kamala Harris has proposed a 28% corporate tax rate. Donald Trump would likely push for a continuation of the 21% rate instituted under his previous administration. But given the current government deficit, Buffett sees the current rate as unsustainable.
What Buffett hasn't said explicitly, though, is that selling now to save on taxes later only makes sense if he also feels the stocks he's selling are trading near or above their intrinsic value. Buffett wouldn't sell a stock trading well below its real value just to save on taxes. And given his lack of investments in other companies, it's clear Buffett doesn't see a lot of opportunities to invest Berkshire Hathaway's funds in right now.
But Buffett has consistently taken the opportunity to buy one high-yield investment, and that's likely where most of Berkshire's cash from stock sales is headed.
The ultrasafe, high-yield investment on Berkshire's balance sheet
Over the last two years, Buffett has been piling money into U.S. Treasury bills. As of the end of Q2, Berkshire Hathaway held $238.7 billion worth of U.S. Treasury bills. It also had about $38.2 billion in cash. That total of $276.9 billion is up from $109 billion as of the end of Q3 2022.
These short-term Treasury bonds mature within 12 months. Buffett prefers short-term government bonds as they provide the highest level of safety. They're more insulated from interest-rate risk, which could cause the value of the bonds to decline, resulting in a loss in value if Buffett needed liquidity.
Over the last two years Buffett's gotten the dual benefits of safety and yield, as short-term bonds paid more in interest than long-term bonds. That's because many expect interest rates to move lower over the long run as the Fed cuts rates and aims to keep them stable. But Buffett has said he'd be happy to keep much of Berkshire's assets in Treasury bonds even if they didn't pay nearly as much.
The reason Buffett's flocked to the safe investment isn't the high yield he can get in today's market. The reason is simple: He doesn't think there's a more effective use for the money.
While that may sound like a stark warning for most investors, the truth is it only applies to the portion of the market Berkshire can operate in. The universe of stocks Buffett could possibly buy is limited to the biggest companies in the world. That makes it harder to earn market-beating returns. "I would not like to be running $10 billion now," Buffett said at the Berkshire shareholder meeting in May. "$10 million I think Charlie or I could earn high returns on," he noted.
That suggests that he doesn't recommend the average investor pile their money into Treasury bills. There are plenty of opportunities out there for small investors with "just" $10 million or less. But if you need a place to park your cash while you look for them, short-term Treasuries still offer an attractive yield for now.
Should you invest $1,000 in Berkshire Hathaway right now?
Before you buy stock in Berkshire Hathaway, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $765,523!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
