Warren Buffett once said his favorite holding period for stocks is, "forever." Therefore, it was likely jarring to shareholders that Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) began selling off its stake in IBM (NYSE:IBM) earlier this year. We also just learned via Berkshire Hathaway's recent 13F filing that Buffett sold another 31% of the IBM stake this summer, trimming the position from 54 million to 37 million shares.
Since Berkshire has a huge amount of excess cash lying around, the fact that Buffett chose to sell could be a sign of deep trouble with IBM. However, while the sale is not exactly great news, I don't think current IBM shareholders should panic, either. Here's why.
First, one must remember that Berkshire's 13F shows us Buffett's trades over the summer, well before IBM came out with its positive third quarter earnings report. While I'm not sure one earnings report would have changed Buffett's mind, the report certainly gave me greater confidence in IBM's turnaround efforts and execution.
In the third quarter, IBM's Strategic Imperatives grew quite handily at 10%, with several segments actually accelerating. That contrasts with the second quarter earnings report (which occurred during the quarter when Buffett was selling) when Strategic Imperatives grew 7% and seemed to be slowing down.
Tax loss selling
Another thing that could have contributed to Buffett's sale was the prospect of a comprehensive tax reform in 2018. The Republicans are trying to lower the capital gains tax rate as part of their tax plan, and Buffett said in a recent CNBC interview that the prospect of tax reform could be affecting what he is buying and selling:
I would feel kind of silly if I realized a billion dollars worth of gains to pay 350 million of tax on it if just waited a few months and would have paid 250.
Thus, if Buffett does not expect IBM's stock to meaningfully appreciate in the near-term, selling shares at a loss would allow Berkshire to realize a greater tax loss on IBM now. Essentially saving the company money in taxes.
If the Republican capital gains tax cut goes through, those tax losses would not be as beneficial in the future. Thus, Berkshire can lower its taxes in 2017 via these IBM losses.
While Buffett probably wouldn't have sold if he thought IBM was going up a lot in the near-term, his quote from the CNBC interview leads me to believe tax reform was at least a factor in his thinking.
The world's greatest investor, not God
Finally, it's possible that Buffett is just plain wrong about IBM. After all, Buffett admitted that he made a mistake with his IBM buy, and has also said that by selling, he could very well be making a mistake twice.
In fact, remember that Buffett exited his stake in Wal-mart around one year ago, and Walmart has been on a tear this year, appreciating 40% over the past twelve months. That's another company fighting back against Amazon, which seems to be holding its own, at least in the near-term.
In fact, Buffett has often said his biggest mistakes were errors of omission, as in, missing out on big winners because he is so risk-averse. In that light, I think his IBM exit has more to do with uncertainty regarding IBM's competitive advantage, not outright bearishness.
What should you do?
As I have written before, IBM is so interesting because it is a very cheap stock on a price-to-earnings basis, and is a mix of declining legacy businesses along with growth shoots in next-generation technologies and patents. In that light, it could fit into either a value or growth investor's portfolio. That being said, there is enough uncertainty around the company that I think it should remain a small or medium-sized position in a well-diversified portfolio.
As we all know, Buffett doesn't like diversification, but rather concentration in high-conviction picks. In that light, and given the prospects of tax reform, it's not surprising to see the Oracle of Omaha lighten up on IBM.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Amazon and IBM. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.