Buffett has favored this high-yield opportunity for several years.
Warren Buffett is one of the world’s most widely respected investors. There’s a good reason for that. He has been making high-profile investments for nearly 70 years, delivering incredible returns for those who want to invest with him. He recently saw Berkshire Hathaway (BRK.A -2.00%)(BRK.B -1.83%) worth more than $1 trillion. It’s come a long way since the $22 million company Buffett bought in 1965, and that’s largely due to Buffett’s investing ability.
Currently, Buffett and his fellow investment managers oversee approximately $600 billion in investable assets for Berkshire Hathaway shareholders. And when Buffett makes changes to Berkshire’s portfolio, the entire investment world takes notice.
Oracle of Omaha’s latest move is to sell a portion of Berkshire’s investment in Bank of America (BAC -0.37%). This bank stock once held Berkshire’s No. 2 position behind Apple (NASDAQ: AAPL), but Buffett is likely to sell it and buy this high-yield investment instead.
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Buffett withdraws cash from bank
Investors typically have to wait until institutional investors like Berkshire Hathaway file Form 13F with the Securities and Exchange Commission (SEC) to see what changes they made to their portfolios in the last quarter. . However, since Berkshire Hathaway owns more than 10% of Bank of America’s outstanding stock, any change in ownership must be reported within three business days. Thus, we can see that Buffett sold $9.6 billion worth of Bank of America stock during the third quarter, and over $140 million more in the first two days of October. .
Bank of America isn’t the only company that Buffett has slashed prices. He sold more than half of Berkshire’s Apple shares between the fourth quarter of 2023 and the second quarter of this year. Apple remains Berkshire’s biggest company, but its second-quarter sales were the largest in Berkshire’s history.
In fact, Buffett has been a net seller of stocks for seven consecutive quarters since the fourth quarter of 2022. Given the size of his sale of Bank of America stock, Berkshire will likely confirm its eighth consecutive quarter of net sales when it reports earnings next month.
There’s a simple explanation as to why Mr. Buffett felt compelled to sell a significant portion of Berkshire’s largest holding, tax and valuation.
Buffett predicts that when the current tax law expires in 2025, current tax rates on corporate profits will be even higher. If nothing happens, the current tax rate could return to 35% from 21%. Kamala Harris proposed a corporate tax rate of 28%. Donald Trump is likely to seek a continuation of the 21% interest rate set under the previous administration. However, given current government deficits, Buffett believes current interest rates are unsustainable.
But what Buffett doesn’t say explicitly is that you should sell now to save on taxes later if you feel the stock you’re selling is trading near or above its intrinsic value. It means that it only has meaning. Buffett doesn’t intend to sell stocks that are trading far below their real value just to save on taxes. And given that he has no investments in other companies, it’s clear that Buffett doesn’t think there are many opportunities to invest Berkshire Hathaway’s money at this point.
But Buffett has consistently opportunistically bought one high-yield investment, and that’s likely where most of the cash from Berkshire’s stock sales will go.
Ultra-safe, high-yield investments on Berkshire’s balance sheet
For the past two years, Buffett has been piling money into U.S. Treasury securities. As of the end of the second quarter, Berkshire Hathaway held $238.7 billion worth of U.S. Treasuries. It also held approximately $38.2 billion in cash. The total amount was $276.9 billion, up from $109 billion at the end of Q3 2022.
These short-term bonds mature within 12 months. Buffett prefers short-term government bonds, which offer the highest level of safety. They are better insulated from interest rate risk, which could cause the bond’s value to fall, potentially resulting in a loss in value if Mr. Buffett needs liquidity.
Over the past two years, short-term bonds have paid more interest than long-term bonds, giving Buffett the dual benefit of safety and yield. Many expect interest rates to fall over the long term as the Federal Reserve lowers rates and aims to keep them stable. But Buffett has said he would be happy to keep much of Berkshire’s assets in government bonds, even if he didn’t get paid the same amount.
Buffett flocks to safe investments not because of the high yields available in today’s markets. The reason is simple. Because he doesn’t think money can be put to better use.
While this may sound like a stern warning to most investors, it actually only applies to a portion of the markets in which Berkshire can operate. The universe of stocks that Buffett could potentially buy is limited to the world’s biggest companies. This makes it difficult to earn profits above the market. “I don’t want to manage $10 billion right now,” Buffett said at the Berkshire shareholder meeting in May. “For $10 million, I think Charlie or I could make a good profit,” he said.
This suggests that he does not recommend that the average investor accumulate funds in Treasury bills. Opportunities abound for small investors with “just” $10 million or less. But if you need a place to store your cash while you’re looking for it, T-bills still offer attractive yields for now.
Bank of America is an advertising partner of The Motley Fool’s Ascent. Adam Levy holds a position at Apple. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
