Warren Buffett Recently Sold 34 Million Shares of Bank of America. But That Doesn't Mean You Should | The Motley Fool (2024)

Here's an intriguing headline: "Warren Buffett's Berkshire trims Bank of America stake for the first time since 2019 after strong rally." And another: "Warren Buffett's Berkshire Hathaway sells 34 million Bank of America shares."

Buffett is arguably the best investor of the past few generations, averaging annual gains of around 20% for decades. So if his company, Berkshire Hathaway, is shedding lots of shares of Bank of America (BAC -1.34%), you might reasonably wonder if you should do the same.

The answer is, "Not necessarily."

Buffett's Bank of America sale in context

Let's first examine this sale in context. Remember that "trimming" doesn't mean selling out of a holding. Before these sales, Berkshire held about 1,032,852,006 shares of Bank of America, per its first-quarter regulatory filing. Berkshire now has close to 999,000,000 shares -- still nearly a billion.

Before the sale (which happened over several days -- July 17, 18, and 19), Berkshire owned a hefty chunk of the bank -- 12.8%. After the sale, Berkshire still owned around 12.4%. Not that much has changed.

Why would a large institutional investor sell part of a major holding? The form institutions are required to submit regarding such sales (or purchases) does not include much explanation.

In other words, we don't know if Buffett thinks the bank's stock is a poor value at the moment. If he did, though, more shares might have been sold. Also, remember that Buffett is famously focused on the long term. He's not likely to sell a holding just because it might be a little overvalued.

It's also worth noting, if you're prone to following the stock purchases and sales of Berkshire Hathaway, that Buffett is not the only decider. He has two investing lieutenants, Ted Weschler and Todd Combs. So any given move might not be driven by Buffett himself.

An institutional investor might also sell part of a holding for a gain in order to offset a loss. Or, in the case of, say, a mutual fund, it might sell shares in order to generate some cash with which to cover withdrawals from the fund.

Think for yourself

So it's generally not smart to sell (or buy) shares of a stock just because some big money did so. Big investors may have very different goals, time horizons, risk tolerance, and portfolio mixes from the rest of us. Buffett may be holding various stocks and aiming to hang on for decades, while you might be approaching retirement rapidly and looking to maximize dividend income or shift some assets into bonds.

Much also depends on each investor's view of a stock's quality and valuation. It's generally best to stick to high-quality companies -- ones with robust balance sheets, sustainable competitive advantages, and great growth prospects. But don't pay just any price for such a stock, or you may have no margin of safety.

If you see a stock as significantly undervalued, you might want to invest in it. If it seems overvalued and you already own it, you should think about how overvalued it seems and what kind of return you might expect from this point on -- until the point at which you might sell. (Remember that money you expect to need within five years, if not a more conservative 10, shouldn't be in stocks. The stock market can be volatile over shorter periods, but over long periods it has always gone up.)

Think about your overall portfolio, too. You should seek some measure of diversification, spreading your dollars across multiple industries and perhaps regions. If any holding grows very large, you might want to trim it, lest you end up with too many eggs in that single basket. It can be good to let your winners keep winning, but if such a winner grows to represent half your portfolio, that can be risky.

So don't read too much into Berkshire Hathaway's trimming of some Bank of America shares. Instead, think for yourself and make decisions that are best for your portfolio. You can see what various investors think about a company by reading up on it. Many investors appreciate Bank of America, for example, because of its strong balance sheet, its increased income from investment banking fees, and its rising assets under management, among other things. Others see it as a likely slow grower with an uninspiring valuation.

Dig into the company a little and see what you think.