Warren Buffett and Berkshire Hathaway could potentially adjust their investment approach due to Donald Trump as president.
It's quite notable that a renowned firm like Berkshire Hathaway (BRK.A -0.39%, BRK.B -0.56%), overseen by Warren Buffett, might adjust its investment tactics based solely on the occupant of the Oval Office. Buffett himself has provided a relatively clear stance on this matter. If any alterations occur in the strategy, they would solely be influenced by one factor: taxes.
In the event of Vice President Kamala Harris's presidential victory, there was a substantial chance that the corporate tax rate would have escalated from its present 21%. Now that Donald Trump has triumphed, the tax rate is likely to remain at most at this present 21% level. So, how does this impact Berkshire Hathaway's investment strategy? It might no longer be in a profit-taking state.
Buffett was concerned about a potential tax rate increase
The most substantial insights into Buffett's investment tactic have stemmed from two sources: his annual shareholder letter and Berkshire's annual conference. In 2024, Buffett gave investors a clue as to why the conglomerate was liquidating one of its most prominent victories and largest holdings, Apple (AAPL -1.32%). Berkshire has been gradually stealing off its substantial stake in the company steadily since the third quarter of 2023 and is enjoying a decent return.
However, considering Buffett's previous praise for the company, along with his strategy of letting his strongest holdings run, this shift raised some red flags among investors. To address these apprehensions, Buffett told investors that the transactions were occurring due to an impending rise in the corporate tax rate. Buffett mentioned during the meeting: "We have no problem paying taxes at Berkshire, and we are currently paying a 21% federal rate on the gains we're realizing from Apple. And that rate was 35% not so long ago, and it was 52% during a time when I was in charge."
However, with Trump in office and the House and Senate under the control of Republicans, the threat of higher taxes is no longer a concern. With this in view, it appears that Berkshire will likely pause selling Apple stock. However, I don't believe this will take place.
Although this might seem like a valid reason to sell initially, Buffett is also sitting on substantial gains from other investments in his portfolio and, in most cases, he isn't liquidating those gains.
Instead, I believe he's selling Apple for a different motive, and nothing a Trump administration can do will deter Berkshire from selling off more Apple stock.
Apple is no longer an investment that offers value
Buffett is a long-term value investor. At their core, value investors acquire a stock that is undervalued and sell it once it reaches full valuation. When Buffett and Berkshire initially bought Apple stock, it was trading for roughly 10.6 times trailing earnings.
That was an affordable price for a company producing a product that millions of people utilize. However, Apple now trades at 39 times earnings, far beyond its typical average.
Now, 39 times earnings could be a reasonable price tag if the business is growing quickly. However, that's far from what Apple is accomplishing.
Since 2023, Apple's revenue and earnings per share have remained relatively unchanged.
Yet, the stock price has significantly surged since the start of 2023. These two factors don't align and suggest that Apple's stock is significantly overvalued. Buffett and his team likely possess the same information and share the same belief. Consequently, they're selling the stock.
We'll have validation of this hypothesis when Berkshire's fourth-quarter transactions are disclosed, as a considerable decrease in its Apple stock holdings would indicate that it's not related to taxes but rather valuation. I'm positive that these sales will continue, and investors holding Apple stock at present might want to consider selling some, as Apple's business hasn't expanded much in the past two years, and a correction might be imminent.
Given Buffett's focus on finance and investing, he might closely monitor potential changes in tax laws that could impact his profitability. If the corporate tax rate was to increase, as suggested by Vice President Kamala Harris's presidential victory, Buffett might adjust Berkshire Hathaway's investment strategy.
Buffet's investment decision to sell a significant portion of Apple's stock wasn't solely dictated by tax considerations. Instead, the stock's overvaluation relative to its earnings growth and the company's stagnant revenue and earnings functioned as the primary motivator for Berkshire Hathaway's sale of Apple shares.
