Why You Should Not Trade Apple Stock Like You're Warren Buffett

Despite a rapidly changing tech landscape, few investors are likely to dispute the assertion that Apple (NASDAQ: AAPL) stock will remain a long-term winner. While its artificial intelligence (AI) capabilities may not receive as much attention as those of Nvidia or Palantir, its massive resources, improving technology, and customer loyalty will likely keep the company a major force in its industry for some time to come.

Knowing those attributes, investors may have trouble reconciling the investment case for Apple, considering that Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) sold a large chunk of its shares. Still, those sales likely have more to do with Warren Buffett and Berkshire Hathaway than the investment case for Apple. Here's why.

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Apple and Berkshire Hathaway

Amid the trust and confidence Warren Buffett has amassed over the last few decades, many investors sometimes want to copy the moves of the investment giant. Investors anxiously await the release of the company's 13F filing every three months, highlighting the company's investment moves over the previous quarter.

One move that has drawn considerable attention is its massive sales of Apple stock. As recently as the third quarter of 2023, Berkshire held close to 916 million Apple shares, and the stock made up over 49% of Berkshire Hathaway's equity holdings.

However, late last year, Berkshire began to sell Apple, and the share selling accelerated in 2024. By the third quarter of 2024, that position had fallen to 300 million shares, now making up approximately 25% of Berkshire's holdings.

What investors should think

Unfortunately, investors often misunderstand Berkshire Hathaway's situation as an investment firm. It does not see the investing landscape in the same way a small investor might, and, due to its size, it has to stay aware of how its purchases and sales may affect a stock.

Berkshire held about $272 billion worth of stock and now has a record $325 billion in liquidity as of the end of the third quarter of 2024. To put that into perspective, Berkshire's cash pile exceeds the market cap of all but 25 companies that trade on U.S. exchanges today.

While this situation offers Berkshire considerable power, it also makes investing difficult. For one, putting a significant amount of that liquidity in one stock would buy out most companies trading today.

Additionally, Berkshire's size significantly affects stock prices. When an average investor buys or sells 100 shares of a company that trades five million shares daily, it does not materially affect the stock price.

In contrast, if Berkshire tries to buy or sell 10 million shares of the same company instantly, it has to bid the price higher or lower to fill that order. Thus, it has to conduct transactions with numerous smaller orders to minimize its influence on the share price.

Moreover, the valuation may have driven the activity of Apple. It accumulated nearly all of its shares between 2016 and 2018. During that time, the average P/E ratio was 15. At the time, Apple was one of the few large companies with significant growth potential and a low valuation, which likely motivated Buffett and his team to take such a large, undiversified position.

Today, its P/E ratio is 42. Considering how expensive the stock has become, it probably makes sense to reduce exposure and build liquidity in hopes of finding a growth company in a comparable position to Apple in 2016.

Making sense of Berkshire's Apple sales

Ultimately, Berkshire Hathaway's sale of Apple stock should not concern the average investor. Indeed, Berkshire selling over two-thirds of its Apple holdings is not reassuring for the company or its shareholders at first glance.

Nonetheless, investors have to keep Berkshire's unique position in the market before jumping to conclusions. The company bought hundreds of millions of shares of Apple cheaply, essentially entrapping Berkshire in a massive, undiversified holding. While average investors can escape a comparable situation in seconds, Berkshire had to sell Apple shares in smaller lots over several months to reduce its exposure to that company.

However, the sale is likely not a worry for Apple shareholders. Despite the scale of Berkshire's Apple sale, it holds 25% of its equity holdings in the stock, which still represents a tremendous vote of confidence in the company.

Moreover, by making these sales, Berkshire takes a profit and diversifies its portfolio, giving it a level of optionality that it did not have prior to going through the long process of unwinding most of its massive Apple position. Hence, while selling large portions of Apple probably makes sense for Berkshire, following in its footsteps is probably not a necessary move for the average investor.

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Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.