Warren Buffett sold about half of his Berkshire Hathaway-held Apple stake in the second quarter and disclosed cash holdings of more than $270 billion at the end of June, further increasing investor concerns about a possible recession.

Apple remained Berkshire’s largest stock position at the end of the second quarter, valued at $84.2 billion, compared to $174.3 billion at the end of 2023. Buffett began selling Apple in the fourth quarter of last year, but the sale has accelerated in 2024.

Buffett praised the iPhone maker’s business at Berkshire’s annual meeting in May, saying it was very likely it would still be Berkshire’s largest position at the end of 2024 and that Apple would likely remain in his ownership even after he left the company.

Buffett’s decision to reduce Berkshire’s Apple holdings provides some important lessons that retail investors can learn from when managing their own portfolios. Here are the key takeaways.

Buffett sells Apple: 4 things investors can learn

1. Benefits of portfolio rebalancing

By selling Berkshire’s largest position, Buffett is reducing the impact it will have on Berkshire’s value going forward. Had Berkshire not sold any of its Apple shares, the stake would have been worth nearly $200 billion at the end of June, compared to Berkshire’s market capitalization of about $890 billion. Even if Buffett still likes Apple’s business, such a large stake would have a huge impact on Berkshire over time.

Individual investors can also benefit from regularly rebalancing their portfolio. While you may not own a single stock that has risen as much as Apple, you may still hold funds that make up a larger portion of your portfolio than you originally planned. Reducing these holdings and adding to positions that have lagged can be an effective way to manage risk in your portfolio.

2. Reviews are important

No matter how good a company is, its price can reach a level where investors can no longer earn an attractive return over the long term. When Berkshire bought Apple in 2016, it sold for about 10 times its annual earnings per share. Over time, that price-to-earnings ratio has improved and is now around 30.

Buffett may still be as enthusiastic about Apple’s business characteristics as he was when he founded the company, but there’s a big difference between paying a P/E of 10 or 30. Companies need to grow their earnings a lot to justify their high P/E ratios, and for a company as big as Apple, that’s not as easy as it used to be.

3. Don’t ignore taxes

Buffett has said that many investors focus too much on avoiding taxes. With capital gains tax, you don’t have to pay taxes until the gain is realized, that is, until you’ve sold part of the investment. Buffett obviously doesn’t mind paying taxes on gains at today’s low tax rates when they could be higher in the future.

“We pay a 21 percent federal tax rate on the profits we make at Apple,” Buffett told shareholders in May. “Not long ago, that rate was 35 percent, and in the past, when I was in office, it was 52 percent.”

“I think there is something going wrong with current fiscal policy and that higher taxes are quite likely,” Buffett said.

4. Learn from past mistakes

One interesting aspect of Buffett’s Apple sale is its similarity to another Berkshire investment that once commanded a high valuation: Coca-Cola. By the late 1990s, Coca-Cola’s shares had risen sharply since Berkshire’s first purchase in the late 1980s, trading for 40 times earnings.

Buffett was on the board of Coca-Cola at the time, a position that made it difficult for him to sell the stock even though he likely knew it was overvalued. Buffett’s longtime business partner Charlie Munger reportedly pressured Buffett to resign from the Coca-Cola board so Berkshire could sell his shares, according to Buffett biographer Alice Schroeder, but Buffett remained on the board and Berkshire kept its shares.

At the end of 1998, Berkshire’s Coca-Cola stake was worth $13.4 billion. Twelve years later, at the end of 2010, it was worth $13.2 billion. Berkshire collected dividends during that time, but the high price-to-earnings ratio of the late 1990s anchored the stock for more than a decade. Buffett seems determined to avoid making the same mistake with Berkshire’s Apple shares.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. Investors are also advised that past performance of investment products is no guarantee of future performance.