Should I follow Warren Buffett and sell my favourite shares?

The world follows investor Warren Buffett more than any other money manager.

But he’s been selling stocks like crazy over the summer via Berkshire Hathaway, the investment company he heads and controls.

We’re not talking about minor positions he’s been holding. No, he’s been dumping great chunks of stock in some of his apparently favourite businesses such as Apple (NASDAQ: AAPL) and Bank of America.

It wasn’t long ago that he was waxing lyrical about computer and smartphone maker Apple. So what’s going on, and should I sell my favourite shares too?

An outstanding performance

Investors and analysts everywhere have been trying to figure out what’s going on in Buffett’s mind regarding these stock sales. But the Oracle of Omaha told us himself at the Berkshire Hathaway annual shareholder meeting back in May.

He said that as he looks around at what’s been going on in the world and in equity markets, he finds cash to be “quite attractive”.

He’s not kidding. His holding in Apple shares has dropped from around 900m shares to about 300m. Meanwhile, Berkshire Hathaway’s cash hoard has ballooned to a record $325bn or so.

However, for context, Apple has been a fantastic performer for Berkshire Hathaway. Since 2016 when Buffett started buying the stock.  It’s risen several-fold, and in the process, it became an outsized position in the overall portfolio.

Apple’s success as a growth business has led to a full-looking valuation too. With the stock just above $223, the forward-looking price-to-earnings (P/E) rating is above 30.

Meanwhile, Buffett’s history shows that valuation is one of the key tools he uses in his investment process. He regularly looks for stocks to buy with a fair valuation and a margin of safety. So it isn’t a big stretch to imagine him selling stocks that he believes to be overvalued.

However, in fairness, the US stock market in general has been tearing higher for some time. So Apple isn’t the only high-flying stock across the pond.

Is this risk management?

Nevertheless, as mentioned, Buffett said he views cash as being attractive right now. So has he been trimming an oversized position in an overvalued stock to rebalance and manage the risk in the Berkshire Hathaway portfolio? 

Perhaps. After all, he also said he still admires the qualities that originally attracted him to Apple’s business and its stock.

But the company has its risks too. For example, it relies on consumer spending, which may come under threat if the world dives into another general economic turndown. On top of that, competition has been increasing in Apple’s markets. Another threat is the rise of geopolitical tensions.

Apple’s been top dog in its market niche for some time. Perhaps all good things eventually end.

Should I follow Warren Buffett and sell my favourite shares. No, I don’t think I should. My UK holdings don’t carry valuations as high as many top growth stocks in the US. On top of that, there are no oversized positions in my portfolio and I already have a fair chunk of cash parked on the sidelines.

Nevertheless, I do see Buffett’s cash-hoarding as a sign that there may be volatility ahead in the markets. However, sometimes a decent shakeout can lead to opportunities!