Buffett Sells High

I’m sure plenty of people dismiss it for being too simple, too obvious. But “buy low, sell high” is one of the greatest nuggets of investment advice ever…

“Of course, you wanna buy low, duh…”

Even though we all know that when it’s really time to buy stocks when prices are actually low, most people are in no mood to buy. Because whatever knocked stock prices down – a pandemic, financial crisis, etc – is scary…

Looking back, it seems impossible that nobody wanted to buy stocks when the S&P 500 traded down to 666 in March 2009. That was an ironic low for the index, for sure. The point is that many investors couldn’t see any end to the financial crisis.

On a personal level, I got hate mail for recommending Bank of America at $9 in 2011 – it was two years after the GFC, and people still thought banks were failing…

“Buy low” is just one-half of the equation. It’s the “sell high” part that seems particularly relevant right now. The S&P 500 is trading at very high historic valuations, the trailing Price-to-Earnings (P/E) ratio derived from earnings over the last 12 months is 28. The forward number based on analysts’ estimates is 21.

The good people at FactSet tell us that a forward P/E of 21 is “…above the 5-year average (19.6) and above the 10-year average (18.1).”

So based on the average forward P/E over the last decade, the math says the S&P 500 is 14% overvalued.

Of course, it’s always possible to come up with numbers that make the market look really overvalued. And I suppose it’s possible to come up with numbers that market look undervalued – though it seems to me that would be a lot harder…

But there’s one thing that really bugs me right now, and it’s not a number. It’s Warren Buffett selling a massive chunk of his Apple and Bank of America stock…

Is Buffett Selling High?

Warren Buffett’s fortune has been built on very long-term investing. He bought his first chunk of GEICO in 1976 at $2 a share and completed the buyout in 1996. His Coca-Cola investment dates to 1988. Buffett bought out Dairy Queen in 1998…

Buffett didn’t start buying Apple stock until 2016. And he loaded up – amassing a 907 million share stake. Over the last year, Buffett has sold two-thirds of that stake. Around 600 million shares.

And that’s not all. Buffett has also sold 26% of his Bank of America stake, 233 million shares.

In total, Buffett raised the cash on hand at his Berkshire Hathaway firm to $325 billion dollars.

Why is he selling? What does he see coming down the pike?

For one, Buffett is on record saying that he thinks capital gains taxes are going higher. So by selling now, he’s lowering his potential tax bill in the future. In truth, a potentially higher tax bill is no reason to sell if you think a stock is going higher over the next several years…

It’s much more likely that Buffett thinks Apple’s share price isn’t going higher over the next several years. In other words, Buffett is selling high…

Apple was cheap when Buffett started buying Apple. The P/E was 12 in 2015 as you can see in this table:

aapl p/e