There are some fundamental truths about this market we can learn from watching Warren Buffett.
That’s certainly the case when his $770bn investment giant Berkshire Hathaway (NYSE: BRK.B) sells stocks.
And the third-quarter results are in. So let’s dig into what got culled, and what crucial lessons I’ve learned.
Berkshire Hathaway has boosted its cash pile from $130bn at the start of 2023 to a record $157bn today.
It has heavily cut positions in a series of top US stocks, the company revealed.
Results published in mid November showed the legendary investment firm sold off its last shares in American car stalwart General Motors. That was a position totalling £850m earlier this year. Buffett also trimmed his Amazon holdings and sold 10% of his position in oil giant Chevron.
There’s more. A total £100m stake in consumer goods giant Procter & Gamble and healthcare conglomerate Johnson & Johnson has been a good earner for Buffett. But he also sold these winners to make room for other opportunities, SEC filings show.
These bring the total Berkshire Hathaway sell-offs to $40bn in 2023 alone.
What to learn
Many investors incorrectly sum up Warren Buffett’s philosophy as being: buy and hold forever. Looking at his own moves, that’s patently false.
As chief executive of Berkshire, Warren Buffett has continued to sell shares in publicly traded companies before taking new positions.
That’s because being overinvested is a surefire way to miss opportunities when they arise. Overinvested, in this context, means having all one’s capital tied up in stocks with no extra cash left over.
So if a company an investor likes sees a dip that they think is overdone, the cupboard is bare when they come to take advantage.
Sometimes funding great ideas comes with a painful selling period to find the available cash.
But conviction is important. If I see more upside in one investment than another, I have to trust my gut and my experience. Warren Buffett certainly does.
Between July and the end of September 2023, the Oracle of Omaha sold stakes worth more than $5bn in US and offshore companies.
Pick unloved companies
It’s all very well piling into hot stocks when they make headlines. But I’ve made some of the best gains of my investing career by tracking undervalued companies and swooping in when nobody’s watching.
These businesses should be growing their profits and market share no matter what wider economic conditions look like.
I should look at a company’s balance sheet and scratch my head, thinking: “I don’t understand why this has sold off so much.”
Most new investors get this next part wrong, too. My job is not just to try to pick stocks to outperform the market. Even more important is to protect my capital and not lose money.
I can’t do that if my attention is split, or I’m constantly chasing the shiny new flavour of the month company.
In the dotcom boom, Berkshire Hathaway was ridiculed for ignoring internet stocks. But when the bubble burst and the Nasdaq lost 72% of its value from 2000 to 2002? Berkshire Hathaway increased its value by 80%.
Warren Buffett didn’t make his billions chasing fads. And neither should I.