Sensemaker Daily
The CEO of Berkshire Hathaway has halved his firm’s stake in Apple and now holds $277 billion in cash.
Warren Buffett has been selling a lot of stock. Filings last week revealed that the CEO of Berkshire Hathaway has halved his firm’s stake in Apple and now holds $277 billion in cash.
So what? In a week when global markets had a $6.4 trillion meltdown, that’s not the worst place to be sitting. Magnificent Seven tech stocks, including Apple, were among the biggest losers on Monday as US recession jitters and lacklustre earnings reports pulled the plug on a historic rally for AI-focused companies.
The question now is, what did Buffett see that the market didn’t?
His position. Buffett’s cash hoard is the largest it’s been since June 2005. That was before the financial crisis, which saw Berkshire scooping up hallmark investments for peanuts. This time it looks more defensive. As well as cutting his top-holding in Apple, in the past quarter Buffett has
- sold $3.8 billion, equivalent to 1 per cent, of his holding in Bank of America Corp;
- earned $2.6 billion in interest income on its portfolio of Treasury bills, which is now larger than the sum owned by the Federal Reserve; and
- trimmed his stake in electric vehicle-maker BYD.
Berkshire still lost around $15 billion on its biggest holdings after the global sell-off at the start of this week. An uptick in US unemployment – and a forgone opportunity by the Federal Reserve to cut interest rates – has prompted concerns of a recession. By holding cash Buffett is sticking to his famous adage: “Be fearful when others are greedy, and greedy when others are fearful.”
Cometh the taxman. Apple’s stock has delivered an 800 per cent return since Buffett first disclosed his investment in the company. While Buffett was wary of tech at first, Apple eventually grew to make up half of Berkshire’s holdings. So why dump now?
Part of the reason, say onlookers, is tax. At the Berkshire Hathaway annual meeting in May, the Oracle of Omaha shared his concern that the federal budget deficit looked likely to grow, which may well lead to higher capital gains taxes in the future.
AI overhype? The other possible explanation for dumping Apple is its position in the AI race. AI-focused tech giants took a beating on Monday, and while some of that was an overdue correction to soaring values this year, investors are concerned that potential returns from the giants’ eye-watering investment in AI are overvalued. Sceptics include:
- Sequoia Capital, whose widely circulated research suggests there is a $600 billion gap between current capital expenditures on AI and the revenue needed to justify those investments in terms of “true end customer demand”.
- Daron Acemoglu, Institute Professor at MIT, who estimates that only a quarter of AI-exposed tasks will be cost-effective to automate within the next 10 years, increasing US productivity by a mere 0.5 per cent during that period.
- Hedge fund Elliott Management, which says that Nvidia is “a bubble” and that many AI uses are “never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy”.
Open vs closed. The other issue for Apple that investors highlight is the company’s proprietary approach to hardware and software. That stands at odds with the trend in AI toward models that can be modified and shared without seeking permission. “There’s a broad feeling of open-source being really important to the ecosystem, if not leading the ecosystem, and that just sits diametrically opposed to what Apple is,” says Suzanne Ashman, partner at LocalGlobe.
What’s more… Buffett’s moves won’t have helped market sentiment. But as an investor, he’s always downplayed his knack for timing, preferring instead to focus on long-term trades. The turbulence this week now looks more like a correction than the collapse of the global economy, and as Buffett once said, “if you don’t like corrections, you shouldn’t own stocks.”
