Buffett "madly" dumped Apple, what is the real reason?

Warren Buffett, the stock god, is gradually unwinding Berkshire Hathaway's investment in Apple. This has been the most profitable investment in Buffett's history, accumulating a significant amount of cash for Berkshire Hathaway. However, it is currently unclear whether the stock god will use this capital for large-scale acquisitions.

Last Saturday, Berkshire released its financial report, showing that the company continued to reduce its holdings in Apple and other stocks in the third quarter, bringing in $97 billion in revenue.

By realizing this profit, Buffett has brought Berkshire's cash levels to unprecedented heights. Currently, $325 billion in cash accounts for 28% of Berkshire's asset value, the highest level since at least 1990.

This situation has led followers of the stock god to speculate about his motives for selling. Some investors and analysts believe that Buffett is adhering to the principles he learned under the legendary value investor Benjamin Graham, pointing out that Apple's price-to-earnings ratio is relatively high and does not match its potential earnings growth.

Preparing for Succession?

This week, Apple warned investors that the company's future products may never reach the profitability levels of the iPhone, as the company is investing capital in artificial intelligence to catch up with competitors, including Google's parent company Alphabet.

Others believe that Buffett's praise for Apple in recent years and the lack of other investment opportunities suggest he may have other plans. Buffett has repeatedly stated that he lacks good investment opportunities, leading some to speculate that he is creating funding conditions for his successor or foreseeing some kind of crisis, thus justifying an increase in cash reserves.

Morningstar analyst Greggory Warren told the media, "This is a very strange phenomenon... It raises the question of why accumulate so much cash?"

Warren stated that considering the difficulties Buffett faces in competing with other buyers, he does not believe Buffett is preparing for a large-scale acquisition. Additionally, Berkshire has not provided capital to large U.S. companies seeking hundreds of billions of dollars in support, such as Intel.

Furthermore, Buffett's purchases of other stocks this year have also been limited; by the end of September, he had only bought $5.8 billion worth of stocks. In contrast, Berkshire has sold $133.2 billion worth of stocks.

Some analysts believe these sales have reduced Berkshire's stock risk and provided ample liquidity for future investments, which has been beneficial during past periods of stress. However, some investors think there may be other reasons behind this change.

Jeff Muscatello, a research analyst for Berkshire investor Douglass Winthrop, told the media that valuation issues alone are unlikely to be the "whole reason" for Buffett cashing out. "The upcoming management transition makes this an excellent time to clean up funds for the next generation," he pointed out.

Warren from Morningstar agrees with this view, stating that this is cash that Buffett's successor, Greg Abel, may invest

"Buffett has become more cautious in discussing Berkshire and its future. He knows he may not be there much longer, and he doesn't want to leave his successor with tricky problems to solve."

"He wants Greg to have as much cash on hand as possible."

Analyst: Holding Cash When Stock Prices Are High is the Style of the Oracle

Berkshire has maintained a large cash reserve, partly to ensure that its investment portfolio has enough liquidity to meet future payout demands from its massive insurance business.

Berkshire's investment in Apple began in 2016 when the company purchased less than 10 million shares for $11 billion. The purchase shocked the market, as Berkshire has traditionally avoided fast-growing tech companies. As early as 2012, Buffett told shareholders that even with Apple's improved profitability, he "did not want to buy" Apple stock.

According to insiders who spoke to the media, this initial investment was made by Buffett's deputy, Ted Weschler. In the following months, Buffett gradually came to appreciate Apple's business model, impressed by the frequency of iPhone usage and customer loyalty.

Subsequently, Buffett followed Weschler's lead and began his own buying spree, and with a small fund operated by a subsidiary, Berkshire ultimately held 5.9% of Apple. Last year, the value of its position peaked at nearly $178 billion. According to quarterly disclosure data analyzed by the media, Berkshire's investment in Apple cost about $39 billion.

Some analysts believe that Apple's current stock price is no longer as cheap as when Buffett made his purchase. Buffett has previously stated that he believes short-term U.S. Treasury yields are more attractive than "optional investments in the stock market." Bill Stone, Chief Investment Officer at Glenview Trust, pointed out to the media: "Stock prices, including Apple and Bank of America, have not become cheaper since then. It might be that simple."

According to FactSet, Apple's price-to-earnings ratio is 30 times. Darren Pollock, a fund manager at investment group Cheviot and a Berkshire shareholder, told the media that when Buffett bought Apple, the stock's price-to-earnings ratio was only about 12 to 13 times, and "Apple's growth rate was much faster at that time."

Pollock added:

"When stock valuations are too high, Berkshire's cash increases because Buffett finds fewer buying opportunities. Timing the market's short-term fluctuations is not his style; selling Apple and holding a large amount of cash in a highly valued market is typical of Buffett's style."

Investors will have to wait another three months to confirm his plans. Berkshire told the media that Buffett will share his views in his annual letter in February