One of the things that makes Warren Buffett such a respected investor is that he's happy to share investment lessons with anyone interested.
His annual letters to shareholders are full of ideas about investing philosophy, mistakes made (and learned from), and usually a good turn of phrase or two. And as an investor in the public eye for nearly 70 years, Buffett has never shied away from an opportunity to talk about the lessons the market constantly teaches him.
Buffett recently made a massive change to Berkshire Hathaway's (BRK.A 1.24%) (BRK.B 1.43%) portfolio. He sold around $75 billion worth of Apple (AAPL 1.45%) stock, by far his largest sale of any single equity position in the company's history. As with any decision Buffett makes, I'm sure he has several lessons he's learned from his investment in Apple and the recent cut in the position.
But investors don't have to wait for Buffett to speak or write more about the topic. There are two hidden lessons from Buffett's decision that every investor can learn right now. Hopefully, these lessons will help investors make better financial decisions.
Image source: Getty Images.
Lesson 1: Timing the market is hard
If you were to judge Buffett's decision purely on the stock price of Apple after he sold his shares, he'd get a very poor grade. The average Apple share price during the second quarter was $186.49. Today, the stock trades around 20% higher.
Just by selling a couple of months early, Buffett missed out on potentially $15 billion in additional gains from his Apple investment. Surely, if Buffett had known Apple shares would make a substantial run higher just weeks after he sold, he'd have held onto his shares a little bit longer.
NASDAQ: AAPL
Key Data Points
I'm not saying Buffett was trying to time the market with his Apple sale. But the timing of the sale shows the folly of trying to time the market in the first place.
As Buffett's mentor and professor Benjamin Graham said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." In other words, you won't be able to accurately predict the movement of a stock's price in the short run, but over the long run stock prices reflect a company's intrinsic value.
To that point, Buffett may feel Apple's shares were trading near their intrinsic value when he sold. In that case, it's a neutral decision to sell shares in the long run based on the expectations for the stock alone. But Buffett had another factor in his decision process. And that's something that goes into lesson 2.
Lesson 2: Good decisions sometimes have poor outcomes
Buffett may feel Apple's stock price accurately reflects its intrinsic value, but his decision was heavily influenced by his expectation that corporate tax rates will increase in the future. Corporations currently pay 21% federal taxes on income, including capital gains on investments, but that rate is set to revert to 35% in 2026.
The immediate outcome was negative. Buffett missed out on $15 billion in gains. Even if you factor in the 14% savings on the sale if he continued to hold the stock indefinitely, Buffett "lost money," at least in the near term.
But that doesn't make the decision bad. The decision was based on what Buffett knew about Apple, its share price, the economic environment, the tax code, the political landscape, and a multitude of other factors at the time. A carefully reasoned decision to sell now, pay the taxes at a lower rate, and keep the cash in Treasury bills until a better investment opportunity arises, is unlikely to be a bad decision. More often than not, it'll work out favorably, especially if you take a long-term view of things. It just happened that Buffett's decision had a sub-optimal result.
Buffett's long-term results are a testament to his decision-making ability. By continuously making good decisions he's produced an average compound annual return for Berkshire shareholders nearly double that of the S&P 500 index.
The true results of Buffett's decision on Apple shares remain to be seen. Will Apple stock continue to outpace other investment opportunities Buffett finds and puts the cash proceeds toward? Will tax rates rise in the future? These are unknowable at the time a decision has to be made, but time will tell if Buffett missed something in his decision process. He's never one to shy away from a mistake either, so he'll likely be forthcoming with any lessons learned in the process.
How to be more like Buffett
Buffett's investing is based on future expectations but grounded in the reality of the information available at the time. He's not concerned about what the market will do over the next few weeks or even the next few years for the most part. He wants to own great businesses at a fair price. A fair price, as he determines, by expectations for the business, not the stock, in the future.
If you make investment decisions based on the information you have at the time, reasonable long-term expectations about the business, and you don't ignore anything that goes against your thesis, that's a recipe for building great long-term wealth. If you ignore the short-term results of any single decision and stick to consistently making good decisions, your results will compound over time.
