Bombshells From Buffett Shock Investors

If you haven’t tuned into the annual Berkshire Hathaway shareholder meeting to see highlights, a certain moment is grabbing headlines but another more nuanced one is where your attention should go.

The most poignant moment of the day was when Warren turned to his new right-hand man Greg Able but invited former lieutenant Charlie Munger for his views. The simple question “Charlie?” was enough to melt hearts as it became clear the one-two punch duo of Charlie and Warren that had been a staple of these Woodstock for Capitalists meetings for decades still lived on in Warren, and is a habit that will be hard to break.

That clip is the one that has gone viral for the obvious emotional tug but another comment by Buffett should be reverberating around the world because it has enormous consequences to your wealth.

Key Points

• Warren Buffett heartfelt invitation to ask Charlie Munger to comment stole the spotlight at the Berkshire Hathaway meeting, showcasing their enduring partnership even after Charlie’s passing.
• Buffett’s decision to sell Apple stock for tax reasons reveals his anticipation of future tax hikes, emphasizing the financial benefits of selling now over waiting.
• Selling Apple reflects Buffett’s strategy to build cash reserves, enabling him to capitalize on future market opportunities, echoing his actions during the 2008-09 financial crisis.

The Frightening Thing Buffett Said

At one point during the meeting Buffett was asked why did you sell so much Apple? He went on a rambling explanation that at the time seemed a little disjointed but when you arrived at the conclusion it was clear he was sewing various themes together to explain precisely why he sold Apple.

The short answer is Buffett claims to have sold Apple for tax reasons. It’s a remarkable statement in light of his usual criteria to buy and sell based on company reasons not tax ones but to peel back the layers of the onion reveals the full story.

Buffett made it clear during his initial soliloquy that the current fiscal situation is simply untenable. Taxes will rise, he stated bluntly. By selling Apple now, Berkshire Hathaway can pocket more of its share of the proceeds and pay the government less than will be the case in the future, in his estimation.

Now here’s the kicker that most people overlook. The gains in Apple that Buffett forecasts are not going to eclipse the differential tax liability. Or in other words, Buffett either thinks Apple won’t go up so much from here versus the difference Berkshire pockets in what it keeps now versus later when tax hikes are factored in.

To keep the math simple. Imagine that Buffett believes at the 21% rate now that $1 billion in gains results in $210 million to Berkshire and $790 million to Berkshire. In the future, if taxes rise to 30%, Berkshire keeps $700 million and Uncle Sam gets $300 million. So the differential the company loses in its cash pile by not selling now is $90 million.

If Buffett held the shares for longer, he doesn’t expect them to go up far enough to offset the increase in tax liability hike. So clearly he thinks taxes are going to go up by more than that proportion of his Apple share ownership.

What’s The Takeaway?

Buffett had another takeaway in his discussion on the topic which is raising cash now is a priority because he expects a calamity at some point just as the 2008-09 market led to massive opportunities.

He also expressed some regret that he didn’t handle that situation as well as he could, a remarkable statement given how he snapped up huge positions in Goldman Sachs, Bank of America and others at the time using a large cash hoard.

Clearly raising cash by selling Apple now and locking in higher percentage of the proceeds versus what Berkshire would capture later is more important to Buffett than whatever marginal gains are likely to accrue near-term.

The same strategy can be applied to the ordinary investors too. If sitting on massive capital gains and you expect taxes to rise too, and better prices to follow later, selling now and sitting tight for a crisis may well be among the smarter plays. But, like Buffett, only with a small percentage of the overall portfolio.