Ajit Jain Sells More Than Half of His Berkshire Hathaway Stake: A Warning for Warren Buffett’s Empire?

It’s always exciting when an important executive of a large company makes a big open market purchase or sale. But it is especially notable when the directors at Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.72%) make a big move.

Last Monday, Berkshire Vice Chairman Ajit Jain sold $139 million of Berkshire stock, which is good for more than half of his entire stake in the company.

Is Jain’s sale a warning, and should Berkshire investors follow suit?

Ajit Jain’s storied 38-year career

Ajit Jain has led Berkshire’s most important business for the past 38 years. Brought in in 1986 to take over Berkshire’s insurance operations, Jain was praised by Warren Buffett as even more important to Berkshire than Buffett himself. This is because insurance is so central to Berkshire’s operations. Not only is it a key operating segment, but the resulting insurance fleet provides “dry powder” for Buffett and his junior executives to make investments.

In fact, in his 2016 annual letter to shareholders, Buffett wrote, “Ajit has created tens of billions in value for Berkshire shareholders. If there is ever another Ajit and you could trade me for him, feel free. trade!”

Jain was later named vice chairman in 2018 alongside Greg Abel, who is now considered to be Buffett’s successor as CEO when Buffett steps down. This is a title given only to Jain, Abel and the late Charlie Munger.

It is therefore noteworthy that Jain has halved his stake. On Monday, September 9th, Jain unloaded 200 shares of Berkshire Class A at $695,418 per share. He still owns another 116 shares between direct holdings and family trusts, and his charity, the Jain Foundation, owns another 50 shares.

So should Berkshire shareholders be concerned about the stock sale? Here’s why I wouldn’t panic, but also why I might hold off on adding to my Berkshire stake in the near term.

Jain may retire soon

While the personal lives of the Berkshire executives are not known, Jain may be planning to retire soon. He’s 73, and overseeing one of the world’s largest insurance companies, with annual revenue of $169 billion, is a full-time job.

Berkshire Hathaway undoubtedly has plenty of talent in its insurance ranks, bolstered by notable acquisitions in recent years. Berkshire acquired specialty insurer Alleghany Insurance in 2022 and more recently bought a large stake in Chubb (CB 0.42%)a premier insurance brand. While Berkshire’s stake in Chubb stands at just 6.4% at this point, some thought Chubb would make an excellent acquisition for Berkshire as well.

Image source: The Motley Fool.

Valuation and taxes may have also stung Jain

Even if Jain wasn’t thinking of retiring immediately, but perhaps in the next five years, now would have been a good time to take some chips off the table for two reasons: the recent increase in Berkshire’s valuation and the prospect of more capital gains. high and/or income taxes in the future.

On the valuation front, Berkshire’s market capitalization recently eclipsed the monumental $1 trillion mark for the first time. The recent increase was partly due to margin expansion. Berkshire’s price-to-book ratio recently traded at a 10-year high of more than 1.6 times. While not particularly expensive for an insurance-based stock, the valuation is at a decade high for Berkshire.

BRK.A Price-to-book value data by YCharts

And if anyone was thinking of selling any stock in the next few years, now might be a good time to do so because of a potential change in tax policy. Warren Buffett himself alluded to tax considerations at Berkshire’s annual meeting in May as reasons behind his recent big selloff of Apple (AAPL -0.12%).

Buffett believes future taxes are likely to be higher given the current US debt and deficit. Of note, Berkshire’s stock sales would be affected by the corporate tax rate, which was cut from 35 percent to 21 percent in the Tax Cuts and Jobs Act of 2017. But many provisions of the law expire in 2025. Although neither party does not want to raise the rate back to 35%, it is possible that this rate will exceed 21% after negotiations.

There is also talk of raising the maximum capital gains rate for individuals, which would affect Jain. The current rate for high earners is 20 percent, but Vice President Kamala Harris is proposing raising it to 28 percent for those making more than $1 million a year. In addition, she proposes raising the net investment income tax for those with capital gains of more than $200,000 annually from 3.8 percent to 5 percent.

So if all these proposals come into effect, Jain’s total capital gains tax rate would rise from 23.8% to 33%.

Berkshire holders shouldn’t panic, but there may be better times to add

All of this means that Jain’s sales were likely due to a combination of personal circumstances, Berkshire’s valuation at the upper end of normal, and tax considerations.

Still, if anyone liked Berkshire as a long-term holding yesterday, you probably shouldn’t panic and sell your shares today. Warren Buffett is 94 years old, so you shouldn’t be invested in Berkshire if you don’t trust Abel and young investment managers Todd Combs and Ted Wechsler to carry on Berkshire’s culture and legacy.

But for those who are more nervous about Berkshire once Buffett leaves, or are considering liquidating some of your Berkshire holdings over the next five years, now may be a prudent time to reduce your stake, as Jain did.