Market watchers are trying to understand the thinking behind Berkshire Hathaway’s sale of its two largest holdings.
Warren Buffett’s company, Berkshire Hathaway, surprised the market this year by selling off two of its largest holdings. First, Berkshire sold more than 60% of its stake in consumer technology giant Apple, which used to account for more than 40% of Berkshire’s stock portfolio. Then, in the second and third quarters, Berkshire reduced its position in Bank of America by more than 28% through a number of small incremental trades.
The move surprised investors who had been enjoying the bull market. It’s difficult for anyone to get inside the mind of one of the greatest investors of all time. But another billionaire investor with excellent returns in the market may have a better idea. Let’s see what David Einhorn thinks.
Is Buffett timing the market?
Mr. Einhorn has been managing the money since he raised $900,000 from family and friends when he was 27 years old. Since his fund, Greenlight Capital, was founded in 1996, it has averaged an annual return of 13.1%, compared to an average annual return of 9.5% for the broader benchmark S&P 500 index. .
In his third-quarter letter to shareholders, Einhorn said he would buy a portion of Buffett and Berkshire’s sales this year and a limited amount of stock to accumulate in cash and Treasury bills. He particularly commented on the Berkshire decision. Einhorn noted that while Buffett has always positioned himself as a long-term investor, he is also very good at timing the market.
When the market became too frothy in the late 1960s, he closed the fund. Towards the market nadir in the early 1970s, he re-emerged as a stock picker, selling all but a few illiquid holdings before the 1987 crash. Subsequently, he avoided various crises in corporate credit and was well-positioned to take advantage of the 2008 global financial crisis. Some might argue that his avoidance of bear markets is the reason for the underestimation of his outstanding long-term returns.
Einhorn said Buffett doesn’t necessarily expect the market to plummet tomorrow. But he may be taking the long-term view that the market, which has continued to hit new highs this year, is overheated and stocks are less attractive at the moment. Einhorn said the market isn’t necessarily in a bubble, but the price-to-earnings ratio is high even as earnings are at cycle highs.
Einhorn is not alone in his concerns about the market. A team of Goldman Sachs strategists recently released a report pegging the S&P 500’s nominal total return at 3% per year over the next 10 years. Strategists believe that because the market has been driven by a small number of companies belonging to the Magnificent Seven, it will be difficult to extend the bull market because companies cannot maintain high revenue growth and profit margins.
Is it time to hit the brakes?
Einhorn makes some very interesting points about Buffett and Berkshire’s long-term sales and how the Oracle of Omaha is better at timing the market than people think. .
This doesn’t mean you should panic and sell all your stocks. Continue to battle-test your portfolio to see if the stocks you own can weather it if a recession materializes, or if a scenario occurs where interest rates don’t fall as much as investors expect. Although market rebounds can be short-term, they are usually healthy for the market in the long run. It could also present a buying opportunity, and the bull market could expand.
If you plan to buy a stock trading at a high valuation, you should think carefully about whether the company can live up to the hype and achieve some of the growth projections that management and analysts have. . Trading stocks based on a compelling story without sufficient evidence that growth will materialize can leave you vulnerable.
Bank of America is an advertising partner of The Motley Fool’s Ascent. Bram Berkowitz has a position at Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Goldman Sachs Group. The Motley Fool has a disclosure policy.
