According to Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) 13F filings for the third and fourth quarters of 2020, the conglomerate reduced its holdings of consumer electronics giant Apple (AAPL, Financial) by 93 million shares.
The decision to sell struck me as strange when it was first announced. Buffett rarely sells any of Berkshire's top five holdings, although there have been a few notable exceptions in the past.
With IBM, he remarked that it was a big, strong company, but it had big, strong competitors. These comments suggested he believed the company had lost its competitive advantage.
With Wells, it's clear Buffett lost trust in the bank after its fake account scandal.
In the past, the Oracle of Omaha has remarked that there are only two reasons why an investor should look to sell a stock: either a better opportunity has come along, and new capital is needed, or the investment case has changed.
So, which was it with Apple? Unfortunately, the answer seems to be neither. Instead, it seems Buffett made a mistake selling the shares, and he's willing to admit it.
At Berkshire's latest annual meeting, Buffett said of the group's Apple position, "I sold some stock last year, although our shareholders still had their percentage interest go up because we repurchase shares. But that was probably a mistake."
According to his annual letter to investors, Buffett spent about $36 billion of Berkshire's cash buying Apple (Berkshire acquired the stake between the first quarter of 2016 and the third quarter of 2018).
Since the acquisition, the conglomerate has "both enjoyed regular dividends, averaging about $775 million annually, and have also — in 2020 — pocketed an additional $11 billion by selling a small portion of our position. Despite that sale — voila! — Berkshire now owns 5.4% of Apple," Buffett wrote in his 2020 letter to shareholders.
Coupled with the $25 billion in repurchases of Berkshire's own stock (around 5% of the company), its own shareholders' interest in the consumer electronics business has increased notably over the past 18 months.
Munger on Apple
Buffett has admitted he made a mistake by selling some of his Apple stake, and he also noted that his right-hand man, Charlie Munger (Trades, Portfolio), had expressed concern about his decision. He said Munger had called the decision an error "in his usual low-key way."
This is not the first time Munger has criticized Buffett about Apple.
In an interview on CNBC at the beginning of 2018, he said of the Apple holding, "I think we've been a little too restrained," before going on to say, "I wish we owned more of it."
When asked whether he thought Berkshire's current holdings of Apple was enough, he merely said "no."
While I am not attempting to attack Buffett in this discussion, I want illustrate the fact that even the best investors make mistakes.
Buffett has admitted he made a mistake by selling such a significant chunk of Berkshire's investment in Apple. The fundamental error was not holding onto a good business. In some ways, he broke his own two rules of when to sell a stock.
We can all learn something from that. First of all, selling a good company is always a bad decision. Second, admitting your mistakes is important.
Buffett admitted he made a mistake. It seems unlikely he will be repeating it anytime soon. If one wants to avoid compounding the error in the first place, one has to admit one has made a mistake and move on.
Disclosure: The author owns no stocks mentioned.
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