What Is Buffett Buying & Selling?

January 24, 2018

What Is Buffett Buying & Selling?

  • A look at what Buffet has been buying and selling lately gives us a few clues about how to spot good investments.
  • What we can also see is his investment psychology, which has been the key to his success.
  • With $106 billion in cash and new dividends coming in constantly, you have to be a net buyer.



Introduction

Buffett recently said that he’s a net buyer of stocks. Many took that as another bullish signal for the whole stock market, but you should be aware that Buffett doesn’t usually buy what others are buying.

A year ago, we analyzed how Buffett was buying stocks but not the market. He was buying Apple (NASDAQ: AAPL) and airlines which all had PE ratios way below the market’s and in the single digits.

We will all know exactly what Buffett has been buying or selling on the 15th of February when Berkshire’s 13-F form will be filed. The last 13-F form showed that he was buying Apple (NASDAQ: AAPL), Monsanto (NYSE: MON) which is an arbitrage play related to Bayer’s acquisition and should be closing soon at $128, and the third most purchased stock was Synchrony Financial (NYSE: SYF). The most sold stocks were IBM (NYSE: IBM) and Charter Communications (NYSE: CHTR).

What Could Buffett Be Buying Now?

I went through the whole list of BRK’s holdings to see what the stocks could be that are a bargain in relation to their intrinsic values and thus interesting for BRK to accumulate. The one that looks to be cheap is IBM due to its PE ratio of 13 and a dividend yield of 3.7%, but it’s unlikely that Buffett has been buying IBM as he sold almost 40% of his holding in the company in the previous quarter at prices that were lower than they are now. Buffett started buying IBM in 2011 at $170 but has since changed his mind about the company as he had expected better things from IBM. He said that he prefers AAPL to IBM now as the future is brighter there.

A company that Buffett holds already but that might be a bargain is U.S. Bancorp (NYSE: USB). Its PE ratio is just 16 with earnings expected to grow at 6% per year.

Another company that Buffett might be buying is General Motors (NYSE: GM) as the PE ratio is still below 10 and he has been buying it since 2012. The dividend is relatively good and as he has always been positive about the economy, GM might just be the stock that will do well for him.



SYF isn’t as cheap as it was when Buffett started buying it, but the increase in price shows how Buffett really knows how and when to buy bargains.

Figure 1: SYF’s stock prices since going public. Source: CNN Money.

What Is Buffett Selling?

He was selling CHTR and IBM, so he might have continued to do just that as the respective stock prices have only gone up. Further, many of his holdings have extreme valuations that I don’t think Buffett is comfortable with but he probably isn’t selling as there is really no need for cash when you have $106 billion sitting around doing nothing.

It will be very interesting to see what Buffett was buying in Q4 2017 on the 15th of February as it will give us another indication of what might actually be cheap in this market. However, there are some very important things to take out from Buffett’s purchases.

The first thing is that, at least up until now, Buffett has on average managed to buy stocks that have beaten the market. AAPL is up more than 70% since Buffett started buying, airline stocks are also much higher than what Buffett was paying for them while the last purchase, SYF, is also more than 50% higher than when Buffett was buying.



This also means that in any market, even in this one, it is possible to find bargains that will do well and that the market doesn’t recognize value in which shows how the market is actually inefficient. This inefficiency is what allows Buffett to continue to beat the market with his stock picking skills.

Another thing to think about is that Buffett really can’t sell shares. If he dumped his holdings on the market, the stock price would suffer and consequently he wouldn’t be able to get the full value out of it. So he might be a net buyer because he isn’t selling much.

It could also be that for Buffett, it’s all about portfolio allocation between cash and stocks. BRK’s cash position is currently at $106 billion, or 15% of assets and 35% of equity. If he wants to keep such an allocation as long as this market remains expensive, he has to purchase more stocks as the cash pile keeps increasing thanks to the dividends constantly coming in.

So think about finding bargains that can still be found. Buffett shows how.

Further, think about your portfolio cash allocation which is a key component of investing. And finally, don’t forget that stocks usually do well over time and that timing the market is impossible. Therefore, stick to stocks, reinvest the dividends, keep enough cash to buy bargains later, and you should do fine.