Warren Buffett Just Sold Half of His Apple Stock. Three Reasons Why You Shouldn’t Panic.

The news that Warren Buffett Berkshire Hathaway (BRK.A -0.21%) (BRK.B 0.03%) he sold half of his Apple (AAPL 1.37%) The stock likely came as a shock to many investors. While it has often been the largest-market-cap stock in recent years, its growth has played a significant role in Berkshire’s stock’s rise during that time.

But from another perspective, the sell-off is probably not as monumental as it seems. Three key points illustrate why investors shouldn’t panic about the move.

1. Apple remains Berkshire’s largest holding

Despite the size of the move, Berkshire Hathaway still owns about 400 million Apple shares. At about $84 billion, that represented about 29% of Berkshire’s stake at the end of the second quarter, well above Bank of America at the level of 14%.

In addition, even with a drastically lower share count, Berkshire still maintains a highly undiversified position in Apple stock. Buffett has long preached diversification, and a 789 million share position in Apple last quarter meant that Apple accounted for a little less than half of Berkshire’s portfolio.

What’s more, the remaining position signifies continued faith in the company. While it battles competition from its mega-tech peers in the AI ​​space, its leadership in smartphones and the power of the iOS ecosystem make it a technology leader.

In addition, Apple boasts $153 billion in liquidity, giving it one of the world’s most stable balance sheets among public companies. That level of stability makes Berkshire’s large position less risky, and with this recent sale, it’s closer to having a diversified portfolio.

2. Apple stocks have become (relatively) expensive

In addition, Buffett and his team may have been concerned about the company’s valuation. Its P/E ratio of 32 isn’t exactly exorbitant, but its valuation has risen significantly over the years, raising the possibility that it has realized most of the multiple expansion that was supposed to come.

Investors should note that Berkshire acquired the majority of Apple shares between the first quarter of 2016 and the third quarter of 2018. In early 2016, Apple shares were often trading at 10 times earnings.

Its P/E has been steadily rising over that time. Still, it wasn’t until the third quarter of 2018 that the earnings multiple rose above 20. In doing so, Berkshire benefited from a significant increase in the multiple, which has resulted in the stock rising about 700% since Buffett’s team began buying. Because S&P500 Since then, it has delivered a total return of just under 200%, making Apple a clear winner for Berkshire.

AAPL Data by YCharts

3. Berkshire Hathaway’s size means it needs liquidity

Another reason for the sale may be the difficulty of managing an investment company the size of Berkshire Hathaway. Its market capitalization is currently about $890 billion at the time of this writing.

While reaching such a level is undoubtedly an impressive feat, it comes with a key struggle. By the law of large numbers, achieving just 10% growth means that the market capitalization must increase by $89 billion. That is just below the average Market capitalization S&P 500 shares, valued at $92 billion.

By comparison, the average company needs to grow by just $9.2 billion to achieve the same rate of growth. That also means that a $9.2 billion acquisition that would be significant for the average company barely moves the needle for Berkshire.

That brings us back to Berkshire’s $271 billion liquidity position. While that may seem excessive, it likely needs that much cash to make significant acquisitions. Hence, its liquidity position may not be as stellar as many investors and analysts assume.

Understanding Berkshire Hathaway’s Sale of Apple

Ultimately, investors should view the Apple stock sale as an inevitable move, not something groundbreaking.

Yes, the sale is huge by any measure. Nevertheless, 400 million shares is still a significant vote of confidence in Apple’s future, representing a highly undiversified percentage of Berkshire Hathaway’s portfolio. Moreover, Apple has become relatively expensive, especially compared to when it first started buying stocks.

Finally, Berkshire’s massive size means it needs a significant liquidity position to make any significant moves. So rather than viewing this sale as historic for Berkshire, investors should view this move as business as usual for the investment giant.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Will Healy holds positions in Berkshire Hathaway. The Motley Fool holds positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.