The “Oracle of Omaha” didn’t get that name for his lack of foresight. Warren Buffett‘s ability to read the tea leaves, as it were, has made him a very rich man over his 60-year career. So when the billionaire investor makes substantive changes in his company’s key holdings, people pay attention. Why, then, is Buffett scaling back one of Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) central investments?
The firm’s latest shedding of Bank of America stock brings the total sold to nearly $10 billion in just a few months — almost a quarter of its original stake. In turn, Berkshire bought $345 million of a Buffett favorite. Why?
The latest sale is particularly interesting
The Securities and Exchange Commission (SEC) requires large shareholders — investors owning more than 10% of a company’s stock — to report any trade within two business days. After the last sale of almost 10 million shares, Berkshire now owns just shy of 10% of the bank and no longer has to report transactions in a timely manner. Now, any transactions will be reported quarterly on the company’s 13-F filing.
That means any future sales will happen out of the public eye until months later. Although this could make it easier for Berkshire to further reduce its stake without spooking the market, it doesn’t necessarily mean that is what’s happening here. Still, it’s an important factor to keep in mind.
Buffett and Berkshire have done well with Bank of America
Buffett helped Bank of America recover from the 2008 financial crisis, infusing the struggling bank with $5 billion in exchange for preferred stock and warrants to buy an additional 700 million shares at just over $7 per share before 2021. He exercised the warrant in 2017 when the stock was trading above $24. Although he didn’t sell the shares, he netted an on-paper profit of $12 billion in just six years. Over the course of their relationship, Berkshire has turned a total $20 billion investment into more than $40 billion — not bad.
Given the incredible return on his money and the fact that capital gains and corporate taxes are in a favorable place — one that could change under a new administration — a plausible explanation for Buffett’s selling streak is that he’s simply happy with his investment’s performance. He may want to lock in that profit before his company might have to pay more in taxes to Uncle Sam.
Given Buffett’s comments, more could be at play
I think there is truth to this, but it’s not the whole picture. From comments he’s made in the past year or so, it seems clear that Buffett is at least somewhat uneasy with the state of things. In his 2023 shareholder letter, he talked of Wall Street loving “feverish activity” and described the current market as more “casino-like” than in the past, warning that while panics don’t happen often, “they will happen.” This was before the huge stock-market run thus far in 2024. Since Buffett made these comments, the S&P 500 is up about 23%, and by many metrics, the stock market is at one of its highest valuations ever.
I think Buffett’s concern is more specific here, however — it’s not just the market as a whole. There are some reasons to be concerned about the banking sector, and about Bank of America specifically. In the years before 2022, banks bought a large number of debt securities that are now a drain on income.
They bought them when interest rates were low, which meant they had relatively low yields. This would have been fine had things continued as usual, but as we know, rates didn’t stay low. Between 2022 and 2023, the Federal Reserve raised rates rapidly. Although this helped curb inflation, it meant the banks took a loss on these securities. Why? The yields on these securities are fixed. They don’t rise as rates rise, but the rates the banks have to pay depositors do. That means banks are stuck with a large number of securities that pay less to the bank than what the bank must pay to depositors, reducing net interest income — a key metric in the banking sector.
Additionally, the fair value of these securities — that is, what the bank could get for them in a sale — is now less than what they paid, representing an unrecognized paper loss. Of all the major commercial banks, which do you think took on the largest number of these? Yup, Bank of America.
Now, this is only a real issue if things turn south and the bank is forced to sell these securities and realize the loss. If that were to happen, it could affect its ability to remain solvent. This would be a pretty extreme situation and is not likely to happen, but it’s not impossible. Given Warren Buffett’s philosophy and temperament, it would make sense that this would concern him. After all, in the same 2023 shareholder letter, Buffett made it clear that given a black swan event, Berkshire would not be among those who “ignited the conflagration.” Rather, it would be an “asset to the country” as it was in 2008 and “help extinguish the financial fire.”
Buffett keeps buying one stock consistently
Warren Buffett’s favorite stock is his own. Berkshire has now repurchased $3 billion of its own shares this year alone after the most recent purchase. It’s the primary way the company rewards shareholders, since Berkshire offers no dividend. It’s also in line with Buffett’s attempt to keep Berkshire healthy and in a prime position to weather a potential financial storm.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
Warren Buffett Dumps Nearly $10 Billion of 1 Key Stock and Buys $345 Million of His Favorite Stock. Here’s What You Need to Know. was originally published by The Motley Fool
