Updated: Thu, 17 Feb 2011 14:00:00 GMT

Why is Buffett dumping stocks?

Buffett's selling of stocks in recent times is not an indication of his bearishness on US economy.


It is sort of mandatory in the US for a company to release information about stocks it bought and sold on a periodic basis. Warren Buffett's investment vehicle, Berkshire Hathaway did the same a couple of days back.

If one is bullish on stock markets in the near term, the filings by Berkshire Hathaway does not make a very good reading. As per reports, Berkshire Hathaway is believed to have eliminated positions in several stocks during the quarter. These include Bank of America, Nike, Becton Dickinson etc.

As per the Wall Street Journal, Berkshire's more than US$ 52 bn US equity portfolio now includes just 25 companies. This is the fewest it has been in several years.

Warren Buffett's alleged mass dumping does indeed raise a few important questions. None more so than whether the Oracle of Omaha has become negative on equities. If he has, then it certainly is a big reason to worry.

Buffett seldom talks about the broader markets in general. But on occasions he has done so, he has an enviable track record. The one episode that distinctly comes to mind was his Forbes article in 1999 where he talked about how investors expecting double digit returns from stocks from a long term perspective are in for some nasty surprise. And they were sure in for some. Immediately after, the dot com bubble burst and investors incurred huge losses.

Thus, is the current selling spree of Warren Buffett a throwback to that era? Bulls can breathe easy. We don't think it signifies anything of that sort. It should be noted that most of the positions that Berkshire exited appeared to be holdings of car insurer Geico Corp, a subsidiary whose portfolio was not managed by Buffett. Instead, Buffett's long time friend Louis Simpson used to look after it. Apparently, Simpson retired last year and hence the need to do away with the shares that Simpson overlooked.

Besides, Todd Combs, who recently joined Berkshire Hathaway as one of its investment officers, will be given the proceeds that accrued from the sale to manage.

In view of these developments, it would be futile to link Buffett's exit from few stocks as an indication of his new found bearishness towards US stocks. It has more to do with internal reshuffling than anything else we believe.

By Equitymaster – India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian stock markets.

Copyright © Equitymaster Agora Research Private Limited

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