Warren Buffett Sold Apple and Bank of America in Favor of This Boring Investment Offering a 4.3% Yield

Warren Buffett’s significant achievements as an investor haven’t stemmed from attempting to predict market trends or guessing which stocks would rise or fall in the short term. These are tasks he’s acknowledged as being practically impossible. Instead, the key strategy for him and his team at Berkshire Hathaway (BRK.A) (BRK.B) is evaluating whether a company’s current value exceeds or falls below its market price.

The strategy in question has yielded extraordinary outcomes, as evidenced by Berkshire Hathaway’s stock growth. Since Buffett assumed control over the struggling textile business in 1965, the stock has increased at an annual compound rate of approximately 20%. To give a sense of scale, the S&P 500 has only managed to deliver compound annual returns of 10.4% during that same period.

It’s astounding, but over time, the growth can be mind-boggling when you consider the power of compound interest. For instance, from 1965 to 2024, an investment in the S&P 500 (with dividends reinvested) would increase approximately 390-fold. On the other hand, a similar investment in Berkshire Hathaway would surge more than 55,000 times over the same period.

Essentially, investing in stocks that are deemed undervalued by the market generally proves successful. However, as of late, Warren Buffett has observed that some of Berkshire Hathaway’s portfolio holdings might not be worth their current market value. Additionally, he finds it challenging to locate promising new equities for investment. Consequently, Berkshire Hathaway has been unloading stocks for 10 consecutive quarters. During this timeframe, they have offloaded $174 billion more in stocks than they’ve purchased.

At Berkshire Hathaway, there have been significant reductions in two key holdings: Apple (AAPL) and Bank of America (BAC). The company decreased its ownership by approximately 67% in Apple and 39% in Bank of America. Using some of the profits from these sales and others, Buffett has been increasingly investing in a high-yield asset that currently provides a return of about 4.3%.

Cutting some of his biggest holdings

At a certain point, Apple stocks comprised over half of Berkshire Hathaway’s equity portfolio value. Buffett initially invested in Apple shares back in 2016, when they were trading for approximately $25 after adjusting for splits. Over the subsequent years, he significantly increased his holdings, investing roughly $36 billion into it by the end of 2018.

When Buffett first bought Apple shares, the price-to-earnings ratio was approximately 10. This was a remarkably low price for such a stock, even though the company was facing a decrease in net income at the time. Buffett recognized the worth of the iPhone and the overall Apple platform, observing how deeply people were connected to their smartphones. He anticipated that the business would recover due to Apple’s powerful brand, its dominance in the smartphone market, and its robust free cash flow. As expected, the stock significantly increased over the following eight years.

By late 2023, its price had soared beyond 30 times its earnings, a remarkably high ratio for a company with only modest single-digit percentage growth in its earnings per share each year. This high valuation was persuasive enough for Buffett to initiate some withdrawals. From October 2023 through September 2024, he offloaded more than two-thirds of Berkshire’s holdings in the tech titan.

Berkshire Hathaway still keeps Apple as its largest investment, making up approximately a fifth of its total worth. However, with Apple’s forward P/E ratio at 29, it seems unlikely that Buffett will increase his holdings in the near term, unless there are major changes or events.

Last summer, Bank of America was my second-biggest investment, a fact I was quite proud of as an enthusiast. However, over the past three quarters, I’ve decided to scale back my involvement with this company, reducing my stake by 39%. As per our latest 13F filing with the SEC, Bank of America still holds the third spot in my portfolio. But, given recent market movements, it’s possible that I might have sold even more shares during the second quarter.

Berkshire Hathaway initially acquired a stake in Bank of America through warrants received as part of a deal for preferred shares purchased by Warren Buffett in 2011 during a difficult period for the bank. These preferred shares provided decent dividends, but in 2017 it proved more profitable to own common stock instead. Consequently, Buffett used his warrants to swap the preferred shares into common stock and continued to increase this position up until 2020.

Essentially, it appears that Berkshire Hathaway’s move to realize some gains on its Bank of America investment is largely due to valuation concerns. The surge in the stock price has been primarily driven by anticipation that interest rates will decrease. Bank of America holds a substantial amount of longer-term debt, which became challenging when the Federal Reserve was increasing interest rates. However, this positioning could prove advantageous for Bank of America compared to its competitors when interest rates eventually decline.

Over the past couple of years, as the stock price rose, so did its price-to-tangible book value ratio. This ratio has been above 1.6 for most of the last year and is currently around 1.7, significantly higher than its average of 1.49 over the past decade.

The investment paying Berkshire $13.5 billion per year

The substantial stock transactions enriched Berkshire Hathaway significantly. Notably, Buffett’s sales surpassed his acquisitions by an impressive $174 billion over the past two and a half years. A significant portion of this cash was used to settle Berkshire’s substantial tax liability from the previous year, but most of the remaining amount was channeled into a major investment holding.

By the close of the initial quarter, Berkshire Hathaway had amassed approximately $314.1 billion in U.S. Treasury bills on their financial records. With these bonds providing a typical yield of around 4.3%, the company is projected to earn roughly $13.5 billion from interest on their government bond holdings by 2025. This potential income could potentially increase if Buffett decides to purchase additional T-bills during the rest of the year.

Receiving a $13.5 billion payment for simply backing the U.S. government seems like a favorable arrangement. Despite Berkshire Hathaway generating an operational income of $47.5 billion in 2024, Warren Buffett has expressed a preference for investing Berkshire’s accumulating cash (Treasury bills being considered as cash equivalents) into stocks rather than bonds.

In Berkshire Hathaway’s 2024 annual letter to its shareholders, it was stated by Buffett that the vast bulk of the funds invested by shareholders will continue to be primarily allocated towards stocks.

The issue Buffett is dealing with now is that many stocks available on the market are overpriced when considering their value. This is particularly relevant to stocks he could purchase in substantial quantities, as Berkshire Hathaway needs such acquisitions to significantly impact a company of its size. Given its $350 billion in assets, Berkshire’s investment options are mostly limited to large-cap stocks with market caps that can accommodate billions of dollars of capital inflow. Regrettably, these big stocks are currently trading at significantly higher valuations compared to the past. As evidence, the forward P/E ratio of the S&P 500 has surpassed 22, reaching one of its highest levels since the dot-com bubble, except for certain quarters in 2020 and 2021 (before the 2022 market downturn).

If Warren Buffet were an investor with only a few million dollars to spare, he’d undoubtedly discover numerous profitable market opportunities. Smaller and mid-sized companies within the indices typically trade for around 16 times their anticipated future earnings. Interestingly, even the equal-weight S&P 500 index is priced at only 17.6 times its earnings, indicating that smaller entities within this index are currently trading at more appealing valuations compared to its larger constituents.

Delving into less popular companies within the market can uncover hidden gems with valuations higher than their current stock prices. Regularly investing in these undervalued stocks could yield impressive returns in the long term.

2025-07-19 11:32

Cutting some of his biggest holdings

The investment paying Berkshire $13.5 billion per year

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