Why Warren Buffett Just Sold $10.5 Billion Worth of One of Berkshire Hathaway's Largest Holdings

Few investors’ moves and comments draw as much attention as Warren Buffett‘s — and there’s good reason for that. He has a track record nearly 70 years long of producing market-trouncing returns for shareholders. Not only that, but he manages over $600 billion of investable assets for Berkshire Hathaway (BRK.A 0.84%) (BRK.B 0.65%), which is a lot of weight to throw around.

So, whenever Buffett’s regulatory filings reveal he has been selling shares of one of his holdings, it has the potential to sway investors’ opinions about the stock.

Indeed, Buffett has significantly trimmed the size of his equity portfolio over the last few quarters. Berkshire’s stock positions totaled $348 billion as of the end of 2023’s second quarter. That total was down to $280 billion at the end of June this year despite the S&P 500 (^GSPC 0.47%) having climbed by 22.7% in that time. In fact, Buffett sold more stock than he bought in each of the last seven quarters.

It looks like Berkshire will report an eighth straight quarter of net sales when it releases its quarterly numbers next month. That’s because the Oracle of Omaha has sold $10.5 billion worth of one of his top holdings, Bank of America (BAC 1.57%) over the last three months. — and $9.6 billion worth of those sales took place during the third quarter.

Here are two possible reasons behind Buffett’s decision to sell some of his Bank of America stock.

Does Buffett like banks anymore?

Buffett was once a bigger investor in bank stocks. Considering Berkshire Hathaway is an insurance business at its core, the banking and finance industry would seem to be in his wheelhouse.

In 2020, Berkshire Hathaway held stakes in U.S. Bancorp, Wells Fargo, and JP Morgan Chase. He exited the JP Morgan position that year, closed out the Wells Fargo stake in 2022, and sold his last share of U.S. Bank at the start of 2023. There are still a good number of bank stocks in Buffett’s portfolio, but Bank of America remains, by far, its largest position in that sector.

Buffett explained his changing attitudes about the banking industry at last year’s shareholder meeting, which took place shortly after the collapse of Silicon Valley Bank. He noted that because it’s now easy to move money from one institution to another, that makes it a much more fragile environment for banks in which to operate.

Buffett’s comments suggest smaller banks may be much riskier investments today than they were in the past. But Bank of America is huge — the second-largest in the U.S. by assets and market cap — and it has a massive footprint of retail locations, so investors shouldn’t fear that its depositors will withdraw their funds en masse.

It’s extremely solid, and management has done an admirable job of turning it around since Buffett made his initial $5 billion investment in 2011.

So Buffett’s recent sales may be best explained by two factors.

First, Buffett has said his overall recent selling spree is partly motivated by the expectation that corporate tax rates will rise in the near future. The corporate tax cuts that then-President Trump signed into law in 2017 are set to expire at the end of 2025. At that point, corporate taxes on capital gains will reset back from 21% to 35%, unless Congress passes new cuts for businesses. All else being equal, Buffett would rather have Berkshire Hathaway pay taxes on the substantial gains it has made on Bank of America (and some of its other holdings) at the lower tax rate.

Second, Buffett appears to believe Bank of America has been trading recently near its intrinsic value. It wouldn’t make sense to sell shares to save on taxes if Buffett didn’t think the stock was trading within 14% of its intrinsic value. With the majority of those sales taking place at share prices of $39 to $41, Buffett probably doesn’t think the stock is worth much more than that.

Buffett’s most recent sale on Oct. 10 pushed Berkshire’s stake in Bank of America below 10%. That’s under the threshold requiring the conglomerate to report every purchase or sale of Bank of America stock within three days. So we might not find out if Buffett has continued selling Bank of America since then until February.

Should you buy what Buffett’s selling?

It might make sense for Buffett to reduce his stake in Bank of America, but it could be an opportunity for investors interested in the banking industry.

Bank of America was hit hard by the Federal Reserve’s decision to quickly ramp up interest rates in its effort to bring inflation back under control. The bank holds large volumes of bonds on its balance sheet with longer-than-average durations. So while its competitors were buying bonds with higher interest rates, Bank of America was stuck earning lower interest rates on its old bonds, which it needed to hold until they reached maturity. At the same time, it still had to pay higher interest rates to depositors to prevent them from moving their money elsewhere. The result was that Bank of America’s net interest income declined.

But management said its net interest income hit the bottom of its trough in the second quarter, and that investors should expect the metric to grow in 2025. As the Fed continues the rate-cutting campaign it started last month, Bank of America should see some nice improvements. The stock has climbed to about $42 per share, and investors hope that Buffett is done selling at this point. While the current price is above the average price Berkshire sold shares at, it reflects only a slight premium to the bank’s average tangible book value multiple over the last five years. As such, the stock looks fairly priced. In that light, it may make sense for Buffett to sell some shares for tax reasons, but may also make sense for retail investors who are interested in adding a solid bank stock to their portfolio to buy them.