Is it time to cash in?

Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) it is a top stock for many long-term investors. It is led by renowned investor Warren Buffett, has a diverse mix of businesses and has outperformed S&P 500 annually, on average, since the IPO in 1980.

That’s why it was alarming when Ajit Jain, who was Berkshire’s insurance chief for nearly four decades, recently liquidated more than half of his shares for $139 million. It marked Jain’s largest stock sale since he joined the company in 1986. Jain still owns $112 million in stock through his personal holdings, trusts and a nonprofit foundation.

That sale came around the same time Berkshire’s Class A shares hit a new record high of $715,910 on Sept. 3, pushing its market cap above $1 trillion for the first time. Its shares have fallen about 4% since then and reduced its value to about $990 billion. So should Berkshire investors follow Jain’s lead and take some profits off the table?

Why did Ajit Jain sell more than half of his shares?

Jain hasn’t publicized or explained his big stock sale, but there could be some simple explanations. He’s 73, so he might retire soon. Jain was once considered a potential successor to Warren Buffett, but Buffett plans to pass the torch to Greg Abel, who currently heads Berkshire’s energy and non-insurance businesses.

Buffett celebrated his 94th birthday last month, so he may be stepping down in the near future. Jain, like many of Berkshire’s longtime investors, may see this as the end of an era and the perfect time to cash in on some shares.

Jain may also think that Berkshire’s stock and the market in general are overvalued. Berkshire’s stock price has more than doubled over the past five years, and it’s not cheap at 26 times last year’s operating earnings (which Buffett uses as his preferred measure of profitability instead of net income or earnings per share). Five years ago, it was trading at 21 times 2018 operating earnings.

As for the S&P 500, it’s also historically expensive at 22 times forward earnings. This may also be why Berkshire sold many of its top stocks — including Apple and Bank of America — and raise more money.

So Jain’s sale doesn’t necessarily mean Berkshire’s business is in trouble. It could simply be driven by some personal decisions or the belief that short-term gains in stocks are limited.

What is Berkshire Hathaway’s long-term strategy?

Last year, Berkshire Hathaway generated 40% of its operating income from its insurance underwriting and insurance investment subsidiaries. The remaining 60% came from its other subsidiaries in the railways, utilities, energy and consumer sectors. Its operating earnings, in particular, do not include gains or losses on its closely watched investment portfolio of more than 50 stocks and ETFs, as those numbers can fluctuate wildly from year to year.

Berkshire’s primary strategy is to exploit its core businesses to generate fresh cash for its investment portfolio. This strategy works because his main subsidiaries are cash-rich companies, and Buffett excels at picking long-term winning stocks for his portfolio. Some investors may question whether Berkshire can continue to make the right investments if Buffett retires, but his successors likely won’t stray too far from his strategy of picking value stocks and followers of high-growth plays .

In 2023, growth in Berkshire’s insurance business offset headwinds for most of its non-insurance businesses, and its total operating earnings rose 21%. Its non-insurance business should grow faster this year as interest rates fall.

Berkshire ended the second quarter of 2024 with a record $276.9 billion in cash and cash equivalents, so it’s clearly keeping some dry powder for more investments and acquisitions should the market pull back from its highs historical. So he might be setting himself up for some short-term pain — but he’s setting up to plant the seeds for some longer-term gains.

Will Berkshire Hathaway’s stock continue to rise?

Berkshire Hathaway has consistently beaten the market, and I don’t expect that trend to change anytime soon. Ajit Jain’s selling suggests that his stock is nearing a near-term high, but should still generate higher gains over the next few years.

Berkshire Hathaway is a stock built to deliver long-term gains, so investors shouldn’t worry too much about its insider sales, fluctuating valuations or other short-term trading signals. Instead, they should appreciate its diversification, flexibility and ability to continue growing regardless of macroeconomic challenges.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Berkshire Hathaway’s insurance boss is selling half his shares: time to cash in? was originally published by The Motley Fool