The three things that shook the stock markets – London Business News | Londonlovesbusiness.com

American conglomerate Berkshire Hathaway, led by legendary investor Warren Buffett, published its quarterly results over the weekend.

The numbers as such were traditionally good, but the results as such overshadowed mainly 2 accompanying pieces of information.

The first is that the company has significantly reduced its largest investment position in Apple. Until recently, it made up roughly half of the company’s investment portfolio. However, Buffett and his people sold part of Apple’s shares, more than 10%, during the first quarter of this year.

At the time, however, he commented on the sale by saying that, in his opinion, it is still the best business in the world, even better than American Express or Coca-Cola. At the time, Buffett said that unless something unexpected happened, Apple would almost certainly still be the company’s largest position by the end of the year.

At the same time, he added that he expects taxes to increase in the US, so he is selling shares for this reason, so that he does not pay higher taxes later. But now the second quarter has arrived and Buffett has sold about half of the rest of the position, Apple will now make up about 20% of the portfolio’s value, in second place is Bank of America with about half the weight of Berkshire’s portfolio.

However, it should be added that selling Apple is a rational choice, and I say this as a fan of the company and a person who has held the shares for 10 years.

Apple’s shares are near historical highs despite the fact that the company is going through a very difficult period. In recent quarters, Apple has more or less stagnated, in the field of AI the company will probably not do particularly well either, its problems in China are multiplying, regulatory pressures are intensifying and so on.

At the same time, Apple has grown to monstrous proportions in the portfolio over the past few years, and holding such a large stake in one stock is probably not ideal either, especially when you have a 500-800% appreciation on it. Nevertheless, it should be added that Buffett is also human and often makes mistakes in his purchases and sales.

I can mention the bad sales of McDonalds or Costco, after which the shares grew significantly, as well as, for example, TSM or confusing deals with airlines, telecommunications operators or pharmaceutical companies. It is also interesting that the initial impulse to buy Apple shares did not come from Buffett, but from his investment managers Ted and Tod.

The second interesting thing about the results is that the company holds a record amount of cash. The company has been accumulating cash for a long time, at the end of 1Q it was about 189 billion, and now the value has jumped up to 277 billion, mainly due to the sale of Apple.

It is interesting that Berkshire’s investment portfolio is currently in roughly the same value, so the company has roughly half of its money in shares and the other in cash. For a long time, such a defensive attitude may indicate that Buffett is expecting the arrival of some bigger crisis or correction, in which he would use this money to buy shares at lower prices. Stock markets were recently at their highs, and Buffett himself said that he does not see many good opportunities in the market and that he does not mind holding more cash under the current conditions.

Berkshire has most of that in short-term U.S. bonds, which yield roughly 4% a year. Berkshire earned roughly USD 2.5 billion in interest in the last quarter alone, and the company earned another USD 1.5 billion in dividends. So it’s not like the cash is lying idle in the account, but it earns the company literally billions of USD every quarter.

Source: Company filings, Financial Times

It is also interesting if we look at the amount of cash in the context of the size of the company. Currently, cash makes up about 32% of Berkshire’s value, the long-term average is perhaps around 25%. From this point of view, too, the volume is slightly above average.

Source: Bloomberg Terminal

All this is happening in the context of information from the end of last week. Indeed, the US economy created far fewer new jobs than expected and unemployment jumped to 4.3%, the highest value since October 2021.

So investors got scared that the economy was doing worse than expected and started to worry, that the US central bank will cut rates late and the US will fall into recession. The sell-off on the stock market started last Friday, followed by information on Saturday about how Buffett is selling half of his position in the company, which he said is the best business in the world and holds a record amount of cash. Today’s sales were probably supported by Buffett.

The American indices are thus significantly weakening, the broad S&P 500 is down by roughly 3% today, the technological Nasdaq up to roughly 5%. The sell-off was probably not helped by investors’ reactions to the quarterly results of large technology companies, which were generally good, but probably not 100% convincing.