Post New

The $73.7 billion of taxable gains on the sale of investments in the first six months of 2024 represent the largest voluntary income tax liability ( in that he was not required to trigger those gains ) in either the life of Warren Buffett or the life of Berkshire Hathaway. The federal and state income taxes on $73.7 billion of taxable corporate capital gains is about $15.8 billion. And Buffett elected to pay them.

So Buffett was willing to pay $15.8 billion in income taxes for the privilege of selling $97 billion of equities. I know we are dealing with very large numbers here, and managing them can cause very large results; but if you were to make a list of Buffett-like and Buffett-unlike activities – voluntarily entering into a transaction that would require cutting a $15.8 billion check to the taxing authorities would safely fit into the Buffett-unlike column.

When someone has spoken before about tax paying efficiencies suddenly executes in a very tax inefficient manner, I think it means something.

Is this just specific to Apple, or is Buffett expressing an opinion about overall stock market valuations here?

Is this just specific to Apple, or is Buffett expressing an opinion about overall stock market valuations here?

Warren is expressing his strong opinion that the broader S&P 500 index is very overvalues given the risks he sees. He is obviously willing to pay enormous taxes to get out. He said as much at this year's annual meeting in May. He obviously thinks Apple is overvalued at today's price (despite it being a great business) but he is also selling Bank of America more recently.

Buffett made a couple of clear statements at this year's annual meeting to the effect of cooperating/doing whatever elected officials deem to do regarding taxes. Perhaps he is anticipating taxes escalating in the comparatively near future. High stock market valuations, Apple's foreign manufacturing risk, banks having possible exposure to commercial and private equity loan risks and the expectation of higher taxes arriving in possibly 2025 all coupled with the possibility of a market swoon could be what is driving his selling of appreciated holdings. An additional impetus is he is getting his proverbial ducks in a row ahead of checking out in the future. A thought that gives me no comfort saying.

Uwharrie

Is it possible that under the newer tax rules that impact unrealized gains and maybe 2 year rolling calculations? (I don't have specifics)

Basically, with the large increase in 2024 of the investment portfolio might BRK have triggered a new large accelerated tax so Buffet is selling to offset the penalty tax with actual owed taxes under the traditional tax system.

Is this just specific to Apple, or is Buffett expressing an opinion about overall stock market valuations here?

Both. Apple would be reasonably priced at a PE of 20. They are selling above 30, so net taxes the are getting a reasonable price for their shares while reducing their exposure. I’m personally glad they are reducing their stake.

I also think Buffett is trying to make things easier on his successor. If Buffett dies and Abel takes over and there is war (shooting or economic) and Apple ends up getting hit hard, Buffett doesn't want one of Abel's first acts as the new person in charge to have to explain how Berkshire lots billions in their Apple investment. It is easier for Buffett to take the fallout from the tax hit to earnings than it would be for Abel to do so.

Sadly, I have to agree. These quick sales of major stock holdings have me worried that Mr. Buffett got some very bad news from his doctor or something along those lines. Mr. Abel is not a stock picker after all and leaving him a $400B equity portfolio might not be desirable.

Sadly, I have to agree. These quick sales of major stock holdings have me worried that Mr. Buffett got some very bad news from his doctor or something along those lines. Mr. Abel is not a stock picker after all and leaving him a $400B equity portfolio might not be desirable.

I agree that Mr Buffett is well aware that his remaining days at the office are getting fewer and fewer, but I strongly disagree with the conclusion you're drawing.

First, I think it would be wildly out of character for him to try to arrange the portfolio in a way that does not suit what he truly thinks it should be right now.

Second, such a change would be purely so he can influence/bound the choices of a new manager to whom he is in effect delegating that specific capital allocation job function: I think he thinks that once he's gone, it truly is the job of the next team. I doubt if he will even offer any advice unless asked.

And in any case, if Mr Abel (and Todd and Ted) are not sufficiently experienced stock pickers, then surely it would be more of a kindness to leave Apple stock in the drawer than a pile of cash that will be extremely difficult to deploy safely at decent rates of return?

I think there is only one reason that the Apple stock was sold. As with any other investment he does not currently hold, he concluded that, taking into account any potentially foreseeable risks of permanent loss of capital, it did not offer the prospect of a sufficiently/commensurably high rate of return into the future, relative to other opportunities that might reasonably be expected to come up within an acceptable time frame. In short, he thinks Berkshire can probably do better with that money deployed elsewhere. What I don't know is the mix of "foreseeable risk" vis-a-vis "sufficiently high future return prospects". The only other reason that makes sense would be a loss of faith in the trustworthiness of management, which doesn't seem to be an issue at all here.

Jim

Is it possible that under the newer tax rules that impact unrealized gains and maybe 2 year rolling calculations? (I don't have specifics)
Basically, with the large increase in 2024 of the investment portfolio might BRK have triggered a new large accelerated tax so Buffet is selling to offset the penalty tax with actual owed taxes under the traditional tax system.

This is an interesting thought. I had assumed that comments about tax rates were about the headline general corporate tax rate that Berkshire pays on stock sales, which dropped to 21% with the TCJA. I think that rate might settle around 25% in future, but that difference doesn't seem enough to explain a $100bn allocation change.

However, I had forgotten about the alternative minimum tax which may apply to unrealized profits. From reading Berkshire's reports, it seems that the implementation is still vague enough that nobody knows what if anything Berkshire will pay on that front, so maybe the Apple sale interacts with those new rules, or anticipations of the new rules, in some way?

e.g., it's theoretically possible one might have reasoning like this: If you have unrealized gains on something more than fully valued, and are going to have to pay tax this year on that gain even if it isn't sold, you might as well go ahead and sell it. The tax from a sale decision would not be incremental, so would not be a factor in the decision. This would in general lead to more portfolio turnover.

Jim

However, I had forgotten about the alternative minimum tax which may apply to unrealized profits. From reading Berkshire's reports, it seems that the implementation is still vague enough that nobody knows what if anything Berkshire will pay on that front, so maybe the Apple sale interacts with those new rules, or anticipations of the new rules, in some way?

CAMT (Corporate AMT has no effect on Berkshire's taxes in 2024. From the latest 10-Q (this remained the same compared to Q1):

We do not expect to incur CAMT liability in 2024.

CAMT (Corporate AMT has no effect on Berkshire's taxes in 2024. From the latest 10-Q (this remained the same compared to Q1):
We do not expect to incur CAMT liability in 2024.

I have assumed that to be the case. But there could be complexities that I'm unaware of.

And as an aside, the Q1 report was penned in the latter part of April, so that expectation could be deemed to be as of that date. I imagine some decent amount of stock sales (Apple) had already taken place by then. So, though I don't necessarily believe it, that comment could have taken into account a lot of sales: if enough of the anticipated 2024 taxable profits had already been realized taxable profits, then it would create the expectation that the AMT wouldn't apply. By March 31 there was already $14.2bn in taxable realized profits, which moves things in the direction of ensuring that all taxes on gains would be taxes on realized gains.

FWIW, Berkshire's cash tax paid (as opposed to booked tax liability) in recent profitable years has been less than 15% of GAAP earnings before tax.
12.58% in 2023, 13.81% in 2021. So on a very naive reading of things, some CAMT would have been payable.

Jim

And as an aside, the Q1 report was penned in the latter part of April, so that expectation could be deemed to be as of that date. I imagine some decent amount of stock sales (Apple) had already taken place by then. So, though I don't necessarily believe it, that comment could have taken into account a lot of sales: if enough of the anticipated 2024 taxable profits had already been realized taxable profits, then it would create the expectation that the AMT wouldn't apply. By March 31 there was already $14.2bn in taxable realized profits, which moves things in the direction of ensuring that all taxes on gains would be taxes on realized gains.

Highly unlikely. Berkshire used the same language in 2023 10-K & 10-Qs when there were no large stock sales.

Certainly possible that some of these more exotic answers are correct or at least influential. I tend to ride with Occam: the Apple position is just too damn big and maybe a bit wobbly. It’s *twice* the size of GenRe, for example. Bigger than BNSF. And yet it’s not a company over which Berkshire has any control, in a field where it has no special expertise. (And with the AI hobgoblin jumping up and down demanding attention, perhaps an area ready for disruption.)

At least that’s better than what Occam told me yesterday: that Warren’s iPhone stopped working and he’s pissed.

The BoA sales are coincidental, probably.

The BoA sales are coincidental, probably.

I guess some reasons for that sale are more likely than others. It's pretty unlikely that Mr Buffett woke one fine early July morning thinking "we probably need to raise some cash".

Jim

^^ So Buffett was willing to pay $15.8 billion in income taxes for the privilege of selling $97 billion of equities. I know we are dealing with very large numbers here, and managing them can cause very large results; but if you were to make a list of Buffett-like and Buffett-unlike activities – voluntarily entering into a transaction that would require cutting a $15.8 billion check to the taxing authorities would safely fit into the Buffett-unlike column. When someone has spoken before about tax paying efficiencies suddenly executes in a very tax inefficient manner, I think it means something. ^^

It is great to see you back EliasFardo. It seems everyone is at Shrewd'm now. I have really enjoyed your posts over the years.

When someone has spoken before about tax paying efficiencies suddenly executes in a very tax inefficient manner, I think it means something.

Is this just specific to Apple,

I will forever maintain that it was a position size vs risk assessment, but the latest news might not be so happy for Apple. Far be it from me to say Warren can’t see over the horizon, but…

Apple has now had several months in a row of declining sales in China, its 2nd most important market:

Apple's China troubles mount as foreign phone sales sink for 4th month

BEIJING, Jan 3 (Reuters) - Shipments to China of foreign-branded smartphones, including Apple Inc's (AAPL.O), opens new tab iPhone, fell by 47.4% in November from a year earlier, according to data released on Friday from a government-affiliated research firm, down for the fourth month.

Calculations based on the data from the China Academy of Information and Communications Technology (CAICT) showed that foreign brand shipments decreased to 3.04 million units from 5.769 million units a year earlier.

Apple’s sales decline has not been nearly so precipitous, but the worrying trend is the move by Chinese consumers to buy homegrown, rather than foreign cell phones.

its market share declines, Apple launched a rare four-day promotion in China on Thursday, cutting prices by up to 500 yuan ($68.50) on its flagship models to boost sales.
Huawei has emerged as a strong challenger since its return to the premium segment in August 2023 with locally-made chipsets.

Apple briefly fell out of China's top five smartphone vendors in the second quarter of 2024 before recovering in the third quarter. The U.S. company's smartphone sales in China still slipped 0.3% during the third quarter from a year earlier, while Huawei's sales rose 42%, according to research firm IDC.
https://www.reuters.com/business/retail-consumer/f...

It appears the slowdown in the China economy is quite real, with some speculating that they are entering a deflationary period. Consumers are trading down or putting off purchases entirely, the real estate sector is a basket-case and many households have all their wealth tied up in second homes they can’t sell or rent (shades of 2008) and there’s no great relief in sight.

That doesn’t mean there won’t be any positive news from China, just that it may be narrower than people have become accustomed to in the past decade.

Post New

Berkshire Hathaway FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.