Reasons For Berkshire Hathaway, Inc. Reducing Its Publicly Traded Stock Portfolio

-Berkshire Hathaway, Inc. has dramatically reduced its publicly traded stock portfolio. -Berkshire Hathaway, Inc. has dramatically increased its cash/Treasury Bill position to more than $325 Billion.
-Valad Plus® believes that the primary reason for the reduction in Berkshire Hathaway, Inc.’s publicly traded stock portfolio is the 15% Corporate Alternative Minimum Tax on Mark-to-Market gains in publicly traded securities.
-Valad Plus® believes that Berkshire Hathaway, Inc. should be looking to find a private investment or a complete acquisition of a publicly traded company.

   There has been a rather large amount of speculation as to why Berkshire Hathaway, Inc. has been selling down publicly traded stock positions (such as AAPL and BAC) and creating an oversized cash position (currently around $325 billion, including Treasury Bills). It has been suggested that Berkshire Hathaway, Inc. is selling because Berkshire Hathaway, Inc. believes that the market is overvalued or that a downturn is coming. It has also been suggested that Berkshire Hathaway, Inc. is simply right sizing Berkshire Hathaway, Inc.’s portfolio by managing the proportion of Berkshire Hathaway, Inc.’s portfolio in a given security or that Berkshire Hathaway, Inc. is doing what Mr. Buffet said he would do next time when he acknowledged that he might have been better off to have considered selling some of Berkshire Hathaway, Inc.’s KO position when KO’s PE was, in his view, excessive. In addition, Mr. Buffett has expressed his concerns that higher future tax rates are a reason to sell now and with high valuations are a reason that Berkshire Hathaway, Inc. has not bought more publicly traded securities. While it would not surprise us at Valad Plus® to find that there is some portfolio management going on, we also take Mr. Buffett at his word on the tax and valuation concerns, but we believe that the most important reason for the sales and lack of purchases is more nuanced.

   It is the view of Valad Plus® that a portion of Berkshire Hathaway, Inc.’s liquidity position that is described as oversized is overstated. It is Valad Plus®’s view that Berkshire Hathaway, Inc. strives to have at least enough liquidity to equal the float from Berkshire Hathaway, Inc.’s insurance operations, which has grown over the past couple years. That being said, the liquidity position has still dramatically increased and the size and velocity of Berkshire Hathaway, Inc.’s sale of publicly traded securities is unique in the history of Berkshire Hathaway, Inc. (except for the sales toward the end of the 1970’s Nifty Fifty era).

   In our view, the most important reason for this sale of publicly traded securities is the Corporate Alternative Minimum Tax (CAMT) and its application to Mark-to-Market gains on liquid securities held by large corporations beginning in 2023. This 15% tax undoes one of the primary advantages of the buy and hold (or as Mr. Buffett would say, having a favorite holding period of forever) strategy of compounding returns without reducing your investment by paying taxes. Assuming a 20% annual return (in keeping with Mr. Buffett’s long-term historical track record), after CAMT his compounded annual return would become 17%. Assuming a 20% return in keeping with Berkshire Hathaway, Inc.’s long-term over a 20-year period vs 17% return (20% less CAMT) per $1 Billion dollars would be reduced from roughly $38 Billion to $23 Billion. Roughly a 40% reduction. Assuming a return more like the S&P 500’s historic return of 11% would see Berkshire Hathaway, Inc. CAMT impacted net annually compounded return reduced to 9.35%. As such, the ending 20-year total per $1 Billion invested result would be reduced from about $8 Billion to $6 Billion. Roughly a 26% reduction.

   It is the view of Valad Plus®, that Berkshire Hathaway, Inc.’s reduction in public security exposure is caused first and foremost by the 15% reduced compounded return available from public securities owned by Berkshire Hathaway, Inc under the CAMT Mark-to-Market rules. As such, Berkshire Hathaway, Inc. is better off by 15% per year by investing in a private investment instead of a public equity that otherwise have the same returns. If this is the case, Berkshire Hathaway, Inc. also could buy all of a publicly traded company and avoid the Mark-to-Market issue. It would be self-defeating to buy a publicly company that has a large portfolio of publicly traded securities or other liquid assets (such as long-term bonds) that are subject to the Mark-to-Market rules.

   Lastly, it is the view of Valad Plus® that the best type of private investment would be one in which the capital and reputation of Berkshire Hathaway, Inc. could be leveraged.

Analyst’s Disclosure: We and our clients have a beneficial long position in the shares of BRK.A, BRK.B, AAPL, and BAC either through stock ownership, options, or other derivatives. We wrote this article ourselves and it expresses our own opinions, and this should not be construed as investment advice, or a recommendation to purchase or sell any of the securities mentioned. We are not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.