This is a story about Warren Buffett, Apple, and predicting the future. To understand it, you need to know three simple facts:
First, on New Year’s Eve last year, Buffett’s Berkshire Hathaway owned $174.3 billion worth of Apple stock.
Second, at the end of the first quarter of this year, so March 31, that had dropped to $135.4 billion.
Finally, after computing for the degree to which Apple’s stock price fell during that time, it means Buffett unloaded about 115 million Apple shares — the second quarter in a row that Berkshire owned less stock at the end of the quarter than the start.
Actually, I should add a fourth fact: It’s that Buffett insists he’s still bullish on Apple, and that it not only represents the biggest single thing that Berkshire owns, but that Buffett doesn’t expect that to change.
“Unless something really extraordinary happens,” Buffett said Saturday at the annual Berkshire Hathaway shareholder meeting, “we will own Apple, and American Express, and Coca-Cola when Greg takes over this place.”
(“Greg” refers to Greg Abel, the 93-year-old Buffett’s designated successor as CEO. Also worth noting: Apple CEO Tim Cook was apparently in the audience at the meeting when Buffett made these remarks.)
So, what gives? Why sell Apple stock if you think Apple will continue to go up? Especially since Berkshire now is holding onto $189 billion in cash — the asset Buffett has said he likes least, since it inevitably loses value over time.
The reason, Buffett explained has to do at least partially with what he thinks will happen to taxes in the United States:
“We don’t mind paying taxes at Berkshire. We are paying a 21% federal rate on the gains we’re taking in Apple and that rate was 35% not that long ago, and it’s been 52% in the past when I’ve been operating.
…
They can change that percentage any year. … I would say that with the present fiscal policies, I think that something has to give and i think that higher taxes are quite likely. …
It doesn’t bother me in the least to write that check and I would really hope that with all that America has done for all of you, it shouldn’t bother you that we do it.
And, if I’m doing it at 21% this year, and we’re doing it at a lot higher percentage later on, I don’t think you’ll actually mind the fact that we sold a little Apple this year.”
This is worth consdering: For selling Apple to make logical sense, Buffett would have to believe that there’s a likelihood that taxes on stock sales will go up enough to offset future gains in Apple’s stock price, so as to wipe out the potential benefit of holding onto the stock.
Frankly, when I first saw Buffett offer this explanation, I was skeptical. But, given the current volatility and unpredictability regarding which party will hold the presidency or either of the two houses of Congress a year from now, I certainly see the potential.
Seriously, who among us would have predicted in May 2015 that Donald Trump would win the presidential election in 2016, and that that 35 percent to 21 percent deduction to the federal corporate income tax rate that Buffett described, would come to pass?
Not me. I’m not that prescient. But when the so-called Oracle of Omaha speaks about money like this, I’m likely to listen.
And all of that means that if there’s a way your business might consider taking gains now, as opposed to a year or two from now, it might make sense to do so, too.
