April 22, 2024
Stock Market

Warren Buffett is selling this brilliant-performing share. Can I learn something?


Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

In recent months, investment guru Warren Buffett’s Berkshire Hathaway has been selling shares in its biggest holding, Apple (NASDAQ: AAPL). The holding is so huge that the sale of 100m shares in Apple in the final quarter of last year only amounted to a reduction of 1% or so in Berkshire’s holding. But still, a sale is a sale.

As an investor with no Apple shares myself, does this move help me as I try to navigate the stock market myself?

Buffett is Buffett

At a high level, I think that what Warren Buffett does ought to have limited or even zero influence on my own moves.

Each investor has his own motives for acting. They see opportunities in different ways and may have a specific investing objective unique to them.

What is right for Warren Buffett might not be right for me and vice versa.

More generally, though, I reckon Buffett’s sale of Apple shares does potentially contain some useful lessons that can help me become a better investor.

Diversification

One of the most basic yet powerful risk management strategies when it comes to stock market investing is diversification.

That basically means not putting all your eggs in one basket.

Warren Buffett has a portfolio of shares in different listed companies, but Apple dominates it. Even after the sale, Apple accounted for about $176bn of Berkshire’s stock portfolio and was by far its largest component.

For a long time I have been surprised at Apple’s huge role in the portfolio.

I think it is a great company but even great companies can face risks. Apple rose high before only to crash, in the 1980s. Today’s risks include competitive pressure and complex supply chains.

No matter how great a company is, one can have too much of a good thing.

Buy, sell, or hold?

The idea of selling 1% of a holding is strange in some ways. After all, if one has turned bearish enough on a holding to sell it, why not sell as much of it as possible?

Given the size of Warren Buffett’s holding in Apple, that may be impractical without undermining its share price in the process.

On top of that, we do not know the exact reason for the sale. Sometimes, investors trim a position for reasons like tax rules or regulatory requirements, even though they remain upbeat about the firm’s outlook.

Some investors do that to take some profits off the table.

In other words, they try to bank some earnings from a share that has done very (Apple has more than quadrupled in five years), while hanging onto some of their holdings in the hope of even more gains in future.

Buffett has sold some of his Apple stake before, but retains a large stake in the tech giant.

The reasons for the latest sale are not mine to know. But it does provide a useful reminder to me of the discipline of reviewing my own portfolio periodically.

When doing that, I ask whether the role of any one share has become outsized, or the investment case for any given holding has changed.



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