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On this episode of THE FINANCIAL COMMUTE, host Chris Galeski welcomes Jeff Sarti, CEO of Morton Wealth, to discuss Warren Buffett’s sale of Apple shares.

Here are some key takeaways from this conversation:

• Warren Buffett recently sold about 100 million shares of Apple, significantly reducing Berkshire Hathaway’s holdings from $174 billion to $135 billion.

• The sale was attributed to Buffett’s strategy to capitalize on currently low corporate tax rates.

• Chris and Jeff agree that many investors hesitate on selling assets with large unrealized gains to avoid facing tax bills. However, this may not be the wisest decision. Letting investments sit for too long can inadvertently increase risk due to the lack of realizing gains and rebalancing/diversifying one’s portfolio. They suggest investors consider realizing up to 5% of their portfolio’s value in capital gains annually.

• Companies like Disney and Zoom have seen significant declines, emphasizing the risk of not diversifying and placing too much faith in trends.

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Watch previous episodes:

Ep. 84 California Real Estate with Mikey Taylor

Ep. 83 Why Google Advice is Usually Wrong

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Hello everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by CEO of Morton Wealth, Jeff Sarti. Jeff, thank you for joining us.

Excited to be here.

You know, came across an interesting article that talked about Warren Buffett selling somewhere to the tune of like 100 million shares of Apple.

And so, you know, like any news story, you see Warren Buffett selling 100 million shares of Apple.

I had to read it. And it just was interesting because it's hard to fathom 100 million shares of Apple. Like, did he have any left?

He loves the stock. So why did he sell such a large amount?

Right. I mean, he gets up on a platform all the time and says, you know, Coca-Cola, Apple, I think McDonald's, you know, some others. He loves Apple. Yeah. And so I looked at the article and it was fascinating. 

Berkshire Hathaway owns somewhere in the neighborhood of $174 billion worth of Apple.

Yeah. And then by the 331 filing, that was down to $135 billion worth of Apple. So the article estimated that it was somewhere near 100 million shares of Apple. Now why? Why would he sell him billions of dollars worth of Apple stock? 

Yeah, it actually had to do with taxes.

Something that we see investors, have a visceral reaction to and an avoidance of often.

Now I know Berkshire Hathaway is a company so they are subject to different tax rates than people. But his reasoning was, was very interesting. He sold something that he loved in Apple. And we're not making a recommendation here to own something that he really doesn't like, which is cash for something that Berkshire Hathaway already had $189 billion of cash.

Okay. So he sold, you know, 30 or $40 billion worth of Apple stock to own an extra 30 or $40 billion worth of cash, which he already owned, 189 billion, because right now he feels like the corporate tax rate is relatively low. And he's getting a good deal right by selling stock and paying tax today.

How many of our investors do you think look at the world of investing through that lens?

Listen, this is always a struggle right. And this is where emotions and

numbers often collide. But you know, I mean, we both deal with a lot of clients who might have a concentrated stock position that's maybe done incredibly over the years. And they're facing large unrealized gains. They intuitively know they should probably trim and diversify their holdings, but they're paralyzed, right?

Because they don't want to face that large tax bill.

And oftentimes by doing nothing they think that, you know they're doing nothing right? They're making a conscious decision.

I love that you actually phrase it that way. We share a client who call in about a decade ago had a fairly concentrated position. It was roughly about 10% of their portfolio, and he didn't want to sell it because he had relatively large gains. And he actively decided, actively said, I'm not going to do anything. I don't want to pay taxes.

I'm just going to let this thing grow. And the position did well. It did fine. It actually just grew sort of at a moderate pace over the years. But he was living off in his portfolio, so he was trimming from other assets. Wake up. Call it a month ago. After this decade this position grew from a 10% position in the portfolio to now, I think it was like a 22 or 23% position in the portfolio.

So to your point, by doing nothing, that was actually an active decision. Now he has a very concentrated position that we think has undue risk associated with it.

Right. And look, no one has a crystal ball. I'm not saying, you know, buy this or sell that because I know exactly what's going to happen. But clients who are making a conscious decision not to sell something because they don't want to pay taxes... you're saying something to me that's really interesting. I'd rather it go down. So now I can sell it and pay less taxes.

So I'd rather lose money. Yeah, I would, I would rather clients ask themselves this question. If I was given the money today, would I buy this investment at this price?

Hold means you want to buy it. So at that elevated price, Apple at X price, if you want to buy more of it or potentially trim it to bring it down to a more modest percentage of your portfolio and diversify in other things. That's really the question the client should be asking.

Look, I know that our our country has a lot of debt, $30 trillion with a debt. I don't know what's going to happen with tax rates or anything, but historically speaking, you know, Buffett's making a decision because he thinks corporate tax rates are relatively low. So I decided to look it up and, and see what are capital gains tax rates for investors today and what have they been over time.

So right now, for the majority of people, people with less than, you know, $580,000 married filing joint, the capital gains tax rate federally, it is 15%.

If your income is over $583,000 federally, your capital gains tax rate is 23.8% because you get the 20% capital gains plus the 3.8% Medicare surtax. So if you look historically, capital gains tax rates have been anywhere from 12.5% all the way to the mid 30s, around 35%. And that was a few times during the 70s when, you know, our country had more debt and a little bit more inflation feels a little bit ironic.

But, you know, people should be actively thinking about taxes and recognizing, hey, right now we are in a relatively low tax environment. Maybe it does make sense to pay lower taxes today because who knows what could happen down the road.

That's great historical context. And even to reverse the discussion a little bit, just on why we would even raise the issue. If someone has a large position in the portfolio, it comes back to something we always talk about. It's diversification, the power of diversification. And you might think, oh, why not have a large position like Apple in your portfolio?

Apple is an incredible stock that has generated a lot of wealth for investors over the years. But even the best of the best, Apple in this example, think about how volatile it's been over the years I had. I look this up. Apple has been down over 80% two times during its history. Another time down over 70%, another time down over 60%.

So on four occasions you would have lost over half your money in Apple by just sitting tight and holding the position instead of maybe trimming and not paying taxes.

That's a lot of volatility for a great company.

And again, what I like the most about Warren Buffett here is that, you know, people marvel at his investment abilities, but it's really the non-emotional decision making that is so interesting to me. The fact that he's cognizant not only of, you know, how his investments are doing and even owning something like cash that he doesn't like, although cash is earning a pretty good return today.

But he's making a decision for factors outside of the actual businesses that he's investing in. And it has to do with taxes. Two of the biggest mistakes that I see a lot of clients make over time is doing nothing because they don't want to pay taxes or making extreme decisions because they want to avoid taxes, right?

You see it every day with real estate and 1031 exchanges. Let me overpay on a property by $1 million to save 5 or $600,000 from the tax. And let me do nothing because I don't want to pay tax today, we have the ability to model out the tax impact of a number of different decisions through our financial planning software or our preferred partners with that that are CPAs.

What are some other interesting things that you think you see client mistakes clients make because they're trying to avoid or mitigate tax?

Well, I mean, you kind of hit on it, but it's this concept of anchoring when you when a particular investment has done well for you over the years, you become very emotionally attached to it. And that's understandable. But again, you should really treat every day as a new day. And is it a buy or sell decision at that point in time.

And we keep going back to Apple. And despite that volatility, some of the listeners might think, well, you know, still look it's okay to have that volatility because look at the price of Apple today. As long as you would ride through that volatility you would still make a lot of money. One thing is easier said than done, because during one of those 80% drops, would you have sold Apple or at least trimmed it?

Potentially. But let's even look at some other examples. Think about Disney, right? One of the most incredible corporations out there. Disney is down about 50%.

Yeah, it's close to 50% from its high. And now I think it's low hundreds today.

So I looked it up on this as well. It's about flat over the last decade. So we had some clients, for instance with concentrated Disney positions going back ten, 15 years. They decided not to sell, to avoid taxes and to continue to hold on their position. Again, that's an active decision. And now they've held a stock that's basically gone sideways over the last decade.

So again that's now that's a great company. Still what about other examples. Think about something like Zoom. Great company. We use Zoom every day in our lives- down over 90% since it's high. Peloton down 97 or 98%. BlackBerry, a company that we thought was going to be a part of our everyday lives, no longer exists. So you can see how by not trimming, when stocks reach specular or euphoric levels, you could be left holding a bag of pennies as opposed to dollars.

that's what we're trying to avoid. And so if we're managing 100% of somebody's net worth, and we're looking at through the lens of, okay, how do we properly manage the risk, the growth, the diversification? I mean, typically we would recommend, realizing around 5% of the account value in terms of capital gains in a given year.

So long-term capital gains. So if your trust is worth $1 million, we would think it's prudent to be able to realize up to around $50,000 in long-term capital gains in a given year to give us the flexibility to take some chips off the table. re rebalance and diversify, I think that that's pretty standard. 

Start by asking yourself this one question. If I was given the money today in cash, would I use that cash to buy this investment at this price and make sure you're communicating with your advisor to determine the correct amount of capital gains that you're willing to, you know, sort of pay in a given year, or, you know, get up to.

So that way we're managing that risk and rebalancing consistently over time.

And I like that example you gave about a rule of thumb that we use about taking 5% of long term capital gains as a percentage of your portfolio over the course of a year. I like that because it's not an all or nothing decision. If you have a large concentrated stock position, you don't have to sell the whole thing.

Maybe dip your toe in the water, see how it feels, sell a few percent of that as a position, incur some small amount of taxes, and then see from an emotional point of view how that feels. And then you could reevaluate.

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Disclosure: Information contained herein is not written or intended as tax advice and may not be relied on for the purpose of avoiding any federal tax penalties under the Internal Revenue Code. References to specific investments are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. The investments discussed may fluctuate in price or value. Morton makes no representations as to the actual composition or performance of any asset class. All investments involve risk, including the loss of principal. Past performance is no guarantee of future results. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. Morton makes no representation that the strategies described are suitable or appropriate for any person and it should not be assumed that Morton will make investment recommendations in the future that are consistent with the views expressed herein. You are encouraged to seek tax advice and/or financial advice from your professional advisors before implementing any transactions and/or strategies concerning your finances