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Warren Buffett hosted Burk shar's annual shareholder meeting over the weekend and during the meeting he confirmed that burar has continued to sell Apple which is by far its largest position there has been dozens of news articles coming out trying to explain why Buffett is selling apple and the consensus right now seems to be that Buffett is selling Apple for tax purposes however I disagree with this take so in today's video I want to play the full clip of Buffett's response as to why he is selling apple and share my thoughts on what he says afterwards so let's begin by taking a look at what Buffett has to say no I would the but we have so shares I would say that at the end of the year I would think it extremely likely that that uh Apple is the largest common stock holding we have now one interesting thing is that uh Charlie and I uh looked at Common Stocks or marketable equities or the things that people love to look at as being businesses and when we own a Dairy Queen or we own whatever it may be we look at that as a business and when we look own Coca-Cola or American Express or apple we look at that as a business we can buy really wonderful companies in the market as businesses we can't buy all of them I mean all of the their shares we can't buy 90% or 80% or anything like that but when we look at Coca-Cola and American Express and apple we look at them as businesses now there's differences in tax factors there's difference in manager responsibility a whole bunch of things but in terms of deploying your money we always look at every stock as a business and we don't we have no way no attempt made to predict markets we have no attempt made to uh pick stocks I went through many many years uh doing the wrong thing I got interested in stocks very early and I was fascinated by him and and I wasn't wasting my time because I was reading every book possible and everything else but finally I picked up a copy of the intelligent investor in Lincoln and and there was a few sentences in there that that said much more eloquently than I can say it but if you look at stocks as a business and treat the market as something that's doesn't tell you isn't there to instruct you but it's there to serve you you'll do a lot better over time than if you try to take charts and listen to people talk about moving averages and look at the fed pronouncements and all of that sort of thing and so that made a lot of sense to me that and the way i' way I've been allowed to deploy it Charlie and I talked about this of course constantly it's changed over the years as the amount of capital we have and kind has changed and and all that but the the basic principle was was laid out by Ben Graham in that book which uh I picked up for a couple of dollars and uh and which basically said to me you've been wasting your time now but maybe you can use what you've learned or been reading about and put it to better use and then Charlie came along and told me how to put it to even better use and that's sort of the uh story of why we own American Express which is a wonderful business we own Coca-Cola which is a wonderful business and we own Apple which is an even better business unless something really extraordinary happens we we will own apple and American Express and Coca-Cola when Greg takes over this place and plus something dramatically happens that really changes Capital allocation a strategy we will have apple as our largest investment but I don't mind at all under current conditions building uh the uh cash position I think uh when I look at the alternative of what's available in the equity markets and I look at the composition of what's going on in the world we find it quite attractive and one one thing that may surprise you but almost everybody I know pays a lot more attention to not paying taxes and I think they should uh we don't mind paying taxes at Berkshire we are paying a 21% federal rate on the gains we're taking in uh apple and that rate was 35% not that long ago and it's been 52% in the in the past uh when I've been operating and the federal government owns a part of the earnings of the business we make they don't own the assets but they own a percentage of the earnings they can change that percentage any year and the percentage that they've decreed currently is 21% and I would say with the present fiscal policies I think that something has to give and I think that higher taxes are are quite likely and if the government wants to take a greater share of your income or mine or burches they can do it they may decide that someday they don't want the fiscal deficit to be this large because that has some important consequences and they may not want to decrease spending a lot and they may decide they'll take a larger percentage of what we earn and we'll pay it and if I'm doing it at 21% this year and we're doing it at a higher percentage later on I don't think you'll actually mind the the fact that uh we sold a little laple this year here are all of the key points Buffett made in his discussion of selling Apple so let's start right from the top with the fact that birkshire has sold some Apple shares birkshire sold 115 million shares which is roughly 133% of its total holding this is also equal to roughly $20 billion worth of Apple stock but then the next key point is that Buffett does still plan on keeping apple as berkshire's number one stock holding this suggests that Buffett is not wanting to sell out of apple entirely but he is definitely trimming the position right now now the next key point is that Buffett looks at stocks as if they are businesses and this is one of the most important points that every single investor should do as well because stocks are quite literally just pieces of real businesses the business is what has real value and the business is what investors can actually value and what investors are supposed to do is buy or sell the stock based on if the business is under or overvalued in the stock market and the intelligent investor actually says that investors should buy stocks when the business is undervalued and they should sell their stocks when the business is overvalued but you are always looking to the business behind the stock to know if the stock is actually a good buy or if it is a good sell or in other words you look to the business to determine the value of the investment and you do not look to what the stock is currently doing or try to predict the short-term price movement of the stock NOW the next key Point here is that Buffett makes no attempt to try and predict the markets and this is another very key point for all investors because what Buffett means by this is that he is not trying to time the market by selling his Apple shares and he really has no idea if Apple's stock price is going to continue going up up from here in the short term or if the stock is going to fall massively over the next month there is simply no way to know what stock prices are going to do in the short term and therefore it is not worth your time to try and predict what stock prices are going to do or buy and sell stocks based on if you think the stock is going to be up this month or down the next month what this also means is that Buffett is not selling his Apple shares because he thinks the stock is going to go down over the next year or so why he is selling his Apple shares is because he is taking a look at the business behind the stock price and arguably thinking that it could be a little bit expensive right now and all you can do as an investor is base your investment decisions off of the value of the business instead of guessing what the stock price will do in the short term moving on to the next key Point here this one is that the market is there to serve you and not instruct you Buffett brings up this point and then says that he learned it from the intelligent investor so this is very much so just emulating what the intelligent investor says and the intelligent investor says that the market is there for you to take advantage of and it is not there to guide you now what this means is that you have to think for yourself as an investor and you cannot look at the market and its stock prices as a source of truth if a stock is priced extremely high it doesn't mean that it should be and if a stock is priced extremely low it doesn't mean that it should be down there either the market is fueled by emotion in the short term which allows you to buy stocks below their values when investors are scared or pessimistic and sell stocks above their values when investors are excited and optimistic now why this is important is because Buffett is using this example when he is referring to selling Apple shares this suggests that Buffett believes the market is overvaluing Apple stock today and he is taking advantage of that overvaluation and trimming down some of his position if we head over to stock unlock and take a look at Apple's price to earnings ratio today we can see that it is trading for a PE of 28 now if we also take a look at Apple's 10-year average historical price to earnings ratio it is 20.5 so apple is trading roughly 40% above its historical average price to earnings ratio which could suggest that the stock is overvalued today relative to how the market has been valuing Apple shares in the past now additionally a 28 price to earnings ratio is equivalent to an earnings yield of only 3.6% which is not a very high yield on the cost of shares in fact if we take a look at the 10-year bond yield today we can see that it is offering roughly 4.5% which is actually above the earnings yield on Apple shares today therefore Apple shares are not yielding as much as a Government Bond today and what the intelligent investor very clearly says is that this means that Apple shares are not selling for a margin of safety Apple's revenue and earnings are also not really growing and last week I did Cover Apple's earnings here on my channel and I did say that I do believe a 28 price to earnings ratio for a business that is not really seeing any growth is a very expensive price tag for that business apple is also using all of its free cash flow to buy back shares at low earnings yields and again again bonds have higher yields right now so the money that apple is spending on share BuyBacks could actually create more shareholder value if they simply bought bonds instead Buffett knows this as well and this could be another reason why he is trimming down his Apple position Tim Cook is arguably not deploying Apple's cash in a way that creates the most shareholder value additionally Apple using so much money for BuyBacks does suggest that it doesn't know what to do with all of its cash and its free cash flow anymore and again I am sure that Buffett knows this and is taking a look at these facts as well and could be weighing into his decision to trim down his Apple position overall now the next key point in this video is that Warren Buffett does not mind building cash under the current market conditions and I do think that this is a very interesting point the current market condition seems to be that stocks as a whole are very expensive again we already took a look at Apple in this video trading at a 28 priced earnings ratio while the underlying business is not really growing which again is a pretty high price tag to pay for a business that is seeing little growth the S&P 500's priced to earnings ratio is also 27 today which is roughly a 3.7% earnings yield this means that bonds are currently offering a higher yield than the S&P 500 or stocks as a whole which again if we tie that back to the intelligent investor does suggest that stocks as a whole and the S&P 500 as a whole is not offering a margin of safety today it also means that investors could be getting a higher return on their cash if they simply bought bonds instead of investing in the S&P 500 at at its current price so overall the current market conditions do suggest that stocks are looking quite expensive so it does make a lot of sense as to why Buffett may want to build some cash right now and kind of trim up his positions while the market is expensive and he can take advantage of the overvaluations going on in the stock market today I also found this image right here on Twitter which does show Burk shar's historical cash positions and we can see that Burkshire did build up its cash position during the tech bubble of 2000 and the reason for this was because Buffett could not find anything intelligent to do because stocks were expensive we can then see that after the tech Bubble Burst Burk shar's cash position did decline because Buffett was deploying cash during the weakness in the market we can then see that the cash position once again was building in the housing bubble of 2008 and then when the stock market crashed during the financial crisis Buffett did deploy large amounts of capital and Burk shar's cash position dropped once again then over the following decade Burk shar's cash position did build up slowly once again and during the co crash in 2020 the cash position did fall now we can once again see that Burg shar's cash position is at an all-time high and Buffett is building it once again simply because he cannot find anything intelligent to do in the markets due to the markets being overvalued as a whole but moving on to the final key point this one is that Buffett does not mind paying taxes now in the video Buffett did say that Burkshire is going to pay a 21% tax rate on the gains from the Apple cell he then goes on to say that the tax rate would have been 35% not that long ago and historically it could have been all the way up to 52% as he did see 52% tax rates on capital gains in his own investment lifetime he then stresses that the government can really change the tax rate on capital gains whenever they want to and due to the government spending so much money right now and running at such a significant deficit he would not be surprised to see the tax rate on capital gains and overall on corporations increase in the near future High government spending typically leads to higher taxation on its citizens because the government does have to pay back theb deficit and its lending with tax revenue from its citizens so ultimately higher government spending and higher deficits does eventually lead to higher taxation on businesses and Buffett kind of suggests that this could happen in the near future now if taxes are increased later on then Buffett simply says that his sale of Apple shares when the tax rate was 21% may look like a good move and the birkshire shareholders may actually thank him for it if for example the capital gains tax rate does go up to 50% because it ultimately means that birkshire shareholders will be saving a lot of money by selling their Apple shares right now however Buffett does not say that the higher tax rate is why he decided to sell the Apple shares he is simply saying that the lower tax rate right now could look like a good thing in hindsight if tax rates do in fact go up in the future so my opinion on all of this is that Apple became such a large position in berkshire's portfolio the stock is trading high right now Buffett wants to build more cash and he believes that taxes are going to go up in the future therefore it looks like he was looking to build berkshire's cash position and he used the large overpriced Apple position to do so and for those of you who may not know in the tech bubble Buffett held his Coke position despite the stock trading for 70 times earnings he then wrote in the 2003 letter to shareholders that he regretted not selling some stock during the tech bubble and it also took Koch 13 years to make a new high so maybe Buffett also learned from the tech bubble that it can be wise to trim down or sell some of your stocks when they are trading for expensive prices because over valuations can lead to a long period of stocks not producing any returns for you as the investor but as always I would love to hear all of your thoughts down in the comment section below and if you did find this video insightful or helpful in some way then please remember to leave a like on it as it does really help out my channel and I do truly appreciate it also if you are new to the channel and you want to stay up to date and see more stock market related news like this and breaking news that does happen in the stock market then consider subscribing to my channel as well but with that being said thank you all so much for watching as always I truly do appreciate it and I really hope to see you all again in my next one
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