The stock market is going through its first bear market in more than a decade, and investors have felt the pinch in their portfolios. Even Warren Buffett hasn't been immune from the economic impacts of the coronavirus pandemic, as his Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has seen its stock price suffer as well.
Buffett is well known as an opportunist, taking advantage of tough market conditions to pick up bargain stocks on the cheap. This time, though, his most visible actions have been selling stocks. That seems to run counter to Buffett's entire investing philosophy.
There's a good reason underlying most of Buffett's stock sales lately. It has more to do with regulation than fundamental business prospects, though, and that's why it seems so out of line with what the Berkshire Hathaway CEO is likely doing with the rest of his portfolio right now.
What Buffett has sold so far
From what Berkshire Hathaway has disclosed so far, we know about the following moves from Warren Buffett and his company:
- On April 1 and 2, Berkshire sold about 13 million shares of Delta Air Lines (NYSE:DAL), raising $314 million in cash and taking his stake in Delta down from more than 11% to about 9.24%.
- Berkshire also sold shares of Southwest Airlines (NYSE:LUV) in that time period, with a smaller sale of 2.3 million shares raising about $74 million and leaving the insurance giant with a 9.92% stake in the Dallas-based airline.
- Later in April, Buffett sold 860,000 shares of Bank of New York Mellon (NYSE:BK), raising $30 million and leaving Berkshire with a 9.96% stake in the banking institution.
Those sales made huge news, raising all sorts of questions about Buffett's motivations. But if you look closely, you'll notice that the moves took all of those stocks below the 10% ownership threshold. Amid the storm and fury, it's possible that the implications of 10% ownership were the primary motivations for selling the stocks.
What 10% ownership means
There are surprisingly large ramifications from owning a 10% stake in a publicly traded company. One core securities law comes into play, as Section 16(b) of the Securities Exchange Act of 1934 limits the ability of 10% owners to make ongoing trades in a stock, as the 10% owner essentially gains insider status and invites litigation if it continues to buy and sell shares. That's not such a large issue for Buffett, who tends not to trade his positions frequently, but it often comes into play for activist investors looking to influence corporate policy. That's why you'll so frequently see activists take 9.9% or smaller stakes in the companies they've chosen to engage. It leaves them with greater flexibility to exit their positions if they choose later on.
There are restrictions on those who own 5% or more of a company's shares, but they're less severe. In particular, 5% owners are required to file initial disclosures revealing that they've passed that threshold, but they get 10 days to do so. Again, that's a relatively minor issue for Buffett.
The biggest issue for Berkshire is the set of rules governing bank holding companies. Owning 10% or more of a banking institution could force the insurer to face the same regulations that major financial players in the banking industry have to obey, including capital requirements and oversight from the Federal Reserve and other bank regulators. Buffett has repeatedly sold shares of other banks to keep under the 10% threshold, so the recent sale of BNY Mellon isn't surprising in that context.
Buffett's actions carry a lot of weight because so many people follow his every move. However, it's important to see patterns of past behavior and put each transaction into a fuller context.
For now, investors shouldn't draw too many conclusions from Buffett's decision to have Berkshire sell off small stakes in several stocks. Only if the reductions continue will it be evident that the Oracle of Omaha has truly changed his mind about how he views some of the companies in his portfolio of stocks.