Warren Buffett has sold about $23 billion of stock since the beginning of the year, including a recent $2 billion trade in a single concentrated position, Chevron.[1] Buffett has built Berkshire’s cash pile to $153 billion! What does he know that the rest of us don’t?
Buffett, arguably the most gifted investor alive, has famously argued that investors should hold stock for the long haul — that they should “buy and hold” stocks. And yet, he’s choosing now to sell not just his Chevron holding, but several others.
Why the change of heart? What does Warren Buffett know?
Although we don’t know for sure (no one does except Buffett himself), we suspect that Buffett is concerned about a recession and about falling stock prices. Buffett has long championed holding concentrated positions. It’s worked well for him.
Now, it seems he is reducing his concentrated stock positions, especially those which he thinks are invested in companies that are either too expensive, or which have done very well.
This year, Buffett sold a large chunk of his position in Activision Blizzard, in Chevron, in General Motors, in McKesson Corp, and in Vietesse Energy, among others. In other words, he’s selling technology stocks, automotive stocks, pharmaceuticals, and energy/utilities stocks. Buffett appears to be taking a hard look at his portfolio and figuring out which stocks he shouldn’t be holding – prioritizing cash more than he has, maybe ever, in the past.
Financial advisors would be prudent to help their clients conduct a similar examination of their portfolios.
It’s theoretically possible that Buffett is preparing for an acquisition of some type, and that’s why he wants to store up so much cash. His partner Charlie Munger hinted at this possibility in an interview last week with the Wall Street Journal.[2]
But it’s also possible that Buffett is preparing for a recession. A few months ago, Buffett stated that prudent investors should “keep plenty of cash on hand” in preparation for a recession, so that people are going to “keep making intelligent decisions rather than those forced upon them” by being cash-poor during a recession.[3]
As we argued in an earlier post, “Does Falling M2 Signal a Recession?” given that the money supply has shrunk rapidly, a recession seems highly likely. Everything else equal, when the money supply expands, there’s the appearance of an economic boom – at least for a little while. In the beginning of an expansionary period, people have extra cash to spend. But, as the money supply continues to expand, prices rise across the economy. A rising money supply means that the same goods or services cost more than they used to. As we’re all acutely aware, inflation has been out of control in the not-too-distant past.
Buffett recently voiced concerns about the rapid expansion of the money supply. During the Berkshire Hathaway annual summit in May, Buffett said that it’s “madness for the government to keep printing money.”[4]
Since May of 2022, the money supply has slowly been contracting.[5] And this could well lead to a recession – given that recessions are defined by two consecutive quarters of negative GDP, and that government spending is part of GDP.
Buffett is likely selling certain overly-concentrated positions to be prepared for a potential recession ahead – and so should all prudent investors.
Avoid the Tax Hit
Reluctance to pay capital gains tax is a big reason clients hold concentrated positions. But that is not a valid reason, because there are ways to sell and not pay capital gains tax. If you have clients with appreciated real estate, a concentrated stock position, a business holding, or some other capital asset that you’d like to help them “take off the table” in a tax efficient manner, please ask us for a free copy of one our Advisor Guides. Click here to ask for a copy of our Advisor Guide to Selling a Business, Advisor Guide to Appreciated Real Estate, or Advisor Guide to Stock Diversification. Or call 703 437 9720 and ask for Connor or Katherine, or email us at [email protected].
[1] https://finance.yahoo.com/news/warren-buffett-swapped-cash-bonds-233637125.html
[2] https://www.wsj.com/finance/investing/charlie-munger-will-take-your-questions-now-3e842ab7
[3] https://finance.yahoo.com/news/5-things-warren-buffett-says-193334180.html
[4] https://markets.businessinsider.com/news/stocks/buffett-munger-berkshire-meeting-banks-real-estate-musk-ai-dollar-2023-
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