Warren Buffett hasn't found a lot to like in the stock market recently.
In each of the last six quarters, Buffett has sold more stocks for Berkshire Hathaway (BRK.A -1.12%) (BRK.B -0.86%) than he bought. Last quarter, he sold off a big chunk of his Apple (NASDAQ: AAPL) position and the entirety of his Paramount Global (NASDAQ: PARA) investment. All told, he sold nearly $20 billion worth of stocks from Berkshire's portfolio, and he bought less than $3 billion.
Buffett lamented investment opportunities for Berkshire are few and far between as the company grows bigger. With a market cap of about $877 billion, there are only so many investments that can move the needle for the conglomerate. So, when Buffett does add to an existing position or initiate a new one, investors should pay attention, as it could be a big opportunity for anyone following his lead.
Image source: The Motley Fool.
Why is Buffett selling Apple and Paramount?
Buffett trimmed about 13% of his Apple position in the first quarter, leaving Berkshire with just under 800 million shares.
Apple remains Berkshire Hathaway's largest equity position by far, representing around 40% of the portfolio. And Buffett said it's "extremely likely" Apple will remain the largest holding in the portfolio at the end of the year. That's despite selling off shares in each of the last two quarters.
So, why did Buffett sell? In a word: taxes.
Buffett thinks paying taxes now on the massive capital gain for Berkshire's Apple shares is a smart move.
"We are paying a 21% federal rate on the gains we're taking on Apple. And that rate was 35% not that long ago, and it's been 52% in the past," he told the audience in Omaha at the Berkshire Hathaway shareholder meeting. "I would say with the present fiscal policies, I think that something has to give, and I think that higher taxes are quite likely."
So, Buffett is taking the tax hit now because he thinks there's a good chance the taxes will be higher in the future. "If I'm doing it at 21% this year and we're doing it at a higher percentage later on, I don't think you'll actually mind the fact that we sold a little Apple this year," he added.
Buffett also sold shares of Apple in 2019 and 2020 for tax purposes. In 2021, he admitted that was probably a mistake. Still, with the massive run in Apple shares since then, Buffett thought it would be worth it to take the tax bill on the gains now. He could always add shares back to the position if the opportunity presents itself.
With regard to Paramount, Buffett admitted that he's learned a lot about how people value their leisure time and what a successful entertainment business looks like. Based on his sale of Paramount stock over the last two quarters, taking his stake from over 93 million shares to zero, it's safe to say he no longer thinks Paramount has the assets that make a great entertainment company. "I think I'm smarter now than I was a couple of years ago," he noted. "But I also think I'm poorer because I acquired the knowledge in the manner that I did."
What's Buffett buying?
As mentioned, there are only a handful of opportunities Buffett sees in the stock market, and his stock purchases reflect that sentiment.
During the quarter, he bought just $2.7 billion worth of stocks.
About $1 billion of that went to purchase shares of the Liberty SiriusXM (NASDAQ: LSXMA) (NASDAQ: LSXMK) tracking stocks. The tracking stocks are designed to reflect Liberty Media's stake in Sirius XM (NASDAQ: SIRI), of which it owns 83%. Buffett and his team have preferred the tracking stock as it offers a discount relative to buying Sirius XM shares directly, and may better reflect the intrinsic value of Sirius XM's business. The two stocks are set to merge in the third quarter of this year.
Buffett also added a small amount to his stake in Occidental Petroleum (NYSE: OXY). He praised Occidental's assets and CEO Vicki Hollub at the shareholder meeting and said it's an investment he plans to maintain indefinitely in his 2023 letter to shareholders. After a relatively small purchase in February, Berkshire owns a 28% stake in the business.
There were a few other stock purchases as well, but we'll have to wait for Berkshire Hathaway to file its quarterly form 13-F disclosing every position with the Securities and Exchange Commission (SEC).
The only other stock purchase that's been made known is Buffett's $2.2 billion share repurchase of Berkshire Hathaway. He's bought back shares every quarter since the board approved a new policy enabling him to repurchase Berkshire stock whenever he determines the stock is trading below its intrinsic value. He continues to prefer discretionary share repurchases as a means of returning capital to shareholders instead of dividends.
Buffett's biggest purchase, by far, was not a stock. It was U.S. Treasuries. Berkshire Hathaway uses short-term Treasury bills as a place to store cash. Buffett has long preferred short-duration bonds over long-duration bonds, as they provide more flexibility and less interest rate risk. And with high short-term rates in the current environment, he's getting a great return to just sit on cash. He added over $21 billion in cash and short-term Treasuries to Berkshire's balance sheet last quarter.
"I don't mind at all under current conditions building the cash position," he told shareholders. "When I look at the alternative of what's available in the equity markets ... we find it quite attractive."
Until there is a decline in stock prices or interest rates (or both), it shouldn't surprise anyone if Buffett continues to buy Treasuries. He told the audience the total cash and equivalents position could exceed $200 billion this quarter.
