Warren Buffett just sold another $3.1 billion worth of one of Berkshire Hathaway’s largest holdings. Here’s why.

Warren Buffett hasn’t seen much he likes in the stock market in a while. In each of the past seven quarters, Buffett has sold more shares of Berkshire Hathawayhis (BRK.A -0.99%) (BRK.B -1.18%) stock portfolio than new purchases. And it looks like it’s about to turn two.

In the last quarter, Buffett reduced his company’s massive position Apple almost half. It was by far the largest stock sale in Berkshire Hathaway’s history, worth about $72.6 billion. This quarter, Buffett turned his attention to Berkshire’s second-largest holding. At least, it was.

While we normally have to wait until Berkshire’s quarterly filings with the SEC to see what moves the Oracle of Omaha and his team are making in the company’s portfolio, there are some special exceptions. When an investor owns more than 10% of a publicly traded company, they must publicly report each purchase or sale of shares within three days. That’s why we know Buffett sold his Berkshire stake Bank of America (BAC -2.81%).

After selling $3.8 billion worth of stock between July 17 and August 1, Buffett sold another $3.1 billion in late August and early September. The value of Berkshire’s holdings has grown from $41.1 billion at the end of the second quarter to about $34 billion today.

Here’s why Buffett might sell Bank of America stock.

Image source: The Motley Fool.

Making a bank withdrawal

At last year’s Berkshire Hathaway shareholder meeting, Buffett expressed concern about the banking industry. This was right after the Silicon Valley bank collapse, and Buffett expressed the idea that the banking system has changed substantially over the decades and will continue to change. The Silicon Valley bank run proves that in the digital age, a bank run can happen in seconds. “If people think warehouses are still sticky, they’re just living in a different era,” he said.

Buffett later explained that it is impossible to predict how the banking industry will change because of competing incentives from politicians, big bankers, consumers and virtually every other economic actor. But he said he only likes one bank — Bank of America. “I like management,” he said.

He also added a note about Berkshire shares. “I pitched them the deal, so I’m sticking with it.”

It’s one thing to stick with a stock because you like the business and the management. It’s another to stick with it out of loyalty to a decision made over a decade ago. Perhaps Buffett recognized this fallacy earlier this year when he turned his attention to making gains on some of his biggest investments.

As mentioned, Buffett sold a huge amount of Apple stock earlier this year. His reasoning, as he explained at this year’s shareholder meeting, was his expectation that corporate tax rates will rise in the near future. It is better to take the earnings now and pay the tax.

Of course, that only makes sense if the stock is trading for what Buffett claims is its intrinsic value (or higher). So he wouldn’t liquidate everything Berkshire owns. You may have sold Bank of America stock this quarter because its valuation has risen and it holds significant earnings per share. He bought a good chunk of Berkshire’s Bank of America holdings for just $7.14 a share. The average sale price so far this quarter has been $41.25. At 150 million shares, that’s over $5 billion in realized gains.

Should Investors Sell Buffett?

Bank of America shares have performed well this year amid expectations that the Federal Reserve will begin cutting interest rates. It looks like those rate cuts are finally coming to fruition, with the Fed expected to announce its first rate cut of 2020 later this month.

The bank suffered amid rising interest rates due to holding bonds on the balance sheet with longer than average maturities. As such, the value of these bonds fell as the Fed raised rates. Meanwhile, Bank of America has been stuck holding low-yield bonds while the market has forced it to pay higher short-term interest rates. As a result, net interest income decreased considerably.

But management believes that net interest income has reached a threshold, and value should start to turn around next year. Bank of America should see a huge benefit from lower interest rates because it still holds a lot of long-dated bonds.

Additionally, Buffett’s concern about how “sticky” bank deposits are is less of a factor for Bank of America, given that it is one of the largest banks in the country, making it a bank of importance global systemic, G-SIB. This status gives depositors much more confidence in the bank and the systems that protect it.

The stock is currently trading around its five-year average price to tangible book value, which likely indicates it is fairly valued. So it makes sense for Buffett to take advantage of the current low tax rate, but investors interested in bank stocks may have a good opportunity to buy a great bank well-positioned for falling interest rates.