Warren Buffett (Trades, Portfolio), who is arguably the best investor the world has ever seen, once said that his favorite holding period for a stock is “forever," highlighting the guru’s preference for owning a stake in an undervalued, high-quality business for a long period of time. Until recently, Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) equity portfolio mostly followed this long-term approach to investing, except a few cases where the situation changed.
However, in the last couple of years, I've noticed that Berkshire’s portfolio activity seems to have increased, and the 13F reports demonstrate an increasing willingness to book profits/cut losses from investments in just a few quarters.
One notable instance was Berkshire's 13F for the fourth quarter of 2022, which was released yesterday and showed the firm slashed its investment in Taiwan Semiconductor Manufacturing Co (TSM, Financial) by 86% after having just invested in the company in the previous quarter.
Commenting on this transaction, Tony Huang, vice president at Taishin Securities Investment, said:
"It’s surprising that Berkshire cut its holding so much in just a quarter, which differs from its past practice of long-term investment and continuing to add shares."
Investing $4 billion in a company only to divest 86% of this investment in the following quarter is something Berkshire has hardly done in the past, which begs the question of whether Berkshire Hathaway’s investment strategy has changed in recent years.
Possible reasons behind the sale of Taiwan Semiconductor
While Berkshire has become more active in short-term trading, it could also be the case that Buffett simply thought the situation had changed significantly for the company. As Buffett has said in the past, there are only two reasons why he sells a stock: for better opportunities or because the situation has changed. Since the position was originally worth more than $4 billion, it's likely Buffett had a say in it, though he has been dedicating more responsibility to portfolio managers Todd Combs and Ted Weschler.
Given that Taiwan Semiconductor shares have been trending higher in the last three months alongside broad gains for chip stocks, it really looks like Berkshire missed the bus if it was going for a short-term trade, as the stock declined over its holding period. Why might Buffett have decided to slash the stake at a loss?
First, the escalating tensions between the U.S. and China paint a troubling picture for Chinese chipmakers. Tensions between the two economic powerhouses have reached new heights as the U.S. banned the sale of advanced semiconductor production equipment to China in an attempt to create a more profitable outlook for the new U.S. chip fabs that are being built.
Second, Taiwan Semiconductor is expected to boost its investments in the U.S. to be on the right side with U.S. regulators, and these investments might yield lower returns compared to its investments in Asia. With the Biden administration doubling down on local semiconductor manufacturing, Taiwan Semiconductor pledged to triple its investments in its Arizona plant to $40 billion last December. A week ago, the company announced an additional investment of $3.5 billion in the Arizona facility as well.
Although these investments are necessary to maintain its business relationships in the U.S., a lower expected return from these investments will reflect negatively on its financial performance in the future. In addition to the U.S., both Japan and the European Union are pressuring the company to prioritize local chip production, and the company might have to invest in these countries to secure its business.
The changes have been in progress for a while
One can only speculate about the reasons behind Berkshire’s quick turnaround on Taiwan Semiconductor. What investors can be sure of is that Berkshire Hathaway’s investment strategy has changed in recent years.
One major change is the declining exposure to the consumer defensive sector. As illustrated below, consumer staples accounted for the bulk of Berkshire’s portfolio 10 years ago, but slowly, the company has reduced its exposure to this sector, which could be because of the low growth prospects for many companies in this market.
Another major change is the increased allocation to the tech sector. Before 2000, Buffett had been an open critic of tech companies, but things have changed dramatically in the last couple of decades and Apple Inc. (AAPL, Financial) has been Buffett’s largest holding for many years now. With tech companies touching every aspect of human lives in this digital age, missing out on opportunities in this sector is not an option anymore, and Buffett seems to have acknowledged this fact.
The increasingly important role played by Todd Combs and Ted Weschler in picking stocks could also be a reason behind the non-Apple tech sector investments of Berkshire as well.
Takeaway
Berkshire Hathaway’s eye-popping investment returns in the last four decades did not come as a result of pure luck. Carefully planned investments and a willingness to learn about new industries and companies have helped Berkshire not just survive but thrive.
Today, Berkshire’s investment strategy is yet again changing, with the company now reacting swiftly to new market developments and news. The decision to slash its stake in Taiwan Semiconductor in just a few months since its initial investment is a testament to how Berkshire has become more of an active investor amid challenging market conditions.
One thing to learn from Buffett is that an investor should allow new information to change their thinking pattern and investment strategy without falling victim to confirmation bias.
