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Warren Buffett Reduced This Long-Time Berkshire Hathaway Holding by 67%. Should Investors Follow His Lead?

Motley Fool - Fri Dec 1, 2023

Warren Buffett's track record of success is undeniable. Since becoming chief executive officer of Berkshire Hathaway in 1965, Buffett and his team have produced 20% returns compounded annually. In other words, if you invested $1,000 in Berkshire Hathaway when Buffett took the reins and let it grow over time, you would have nearly $3.8 million today!

Buffett and his team's long track record of investing success is a big reason investors eagerly await Berkshire Hathaway's quarterly form 13-F. The Securities and Exchange Commission legally requires this filing from institutional investors, which discloses their quarterly investing activities.

Berkshire Hathaway was a net seller in the third quarter, trimming $7 billion while buying $1.7 billion in stocks. Globe Life (NYSE: GL) was one stock Berkshire reduced significantly from its holdings, selling 1.7 million shares, or 67% of its total stake. Globe Life is one of the longest-held stocks in Berkshire's portfolio, which it first bought in 2001. Should investors follow Buffett's lead?

Image of Warren Buffett.

Image source: The Motley Fool.

Berkshire Hathaway has held Globe Life through challenging times

Globe Life is a holding company for a group of insurance companies that serve lower-middle to middle-income households in the U.S. It sells life and supplemental insurance, with policies covering cancer, intensive care, and supplemental Medicare. It also has an investment portfolio, mainly fixed-income assets earning interest income.

Berkshire Hathaway has owned stock in Globe Life since 2001 (known as Torchmark until 2019) and held it through a challenging time for life insurers during the COVID-19 pandemic. In 2020 and 2021, Globe Life had $207 million in COVID-related claims costs, with the bulk ($140 million) coming in 2021. As a result, its life insurance underwriting margin narrowed by 8% while its net operating income fell by 4%.

Last year, things improved for life insurers as COVID-related claims costs fell. Globe Life's related claims costs fell to $49 million during the year, its life insurance underwriting margin jumped 23%, and net operating income improved by 14%.

Buffett and his team have trimmed insurance stocks from Berkshire's portfolio in recent quarters

Buffett and his team at Berkshire held more than 6.3 million shares of Globe Life, or about $756 million, coming into this year. The conglomerate has since reduced its position over the past two quarters and now owns just 831,014, or about 13% of its original stake.

While Berkshire didn't disclose why it sold its stake in the insurer, we can look at the conglomerate's other selling decisions to glean some insight into potential reasons. In addition to Globe Life, Berkshire sold some of its stake in the specialty insurer Markel and the insurance broker Aon. The move comes after it sold its remaining position in the insurance broker Marsh & McLennan, which it held for a few years.

It's possible that Berkshire may not see as much upside for insurers, including life insurers like Globe Life, which have seen their stocks blast higher in the past couple of years as pandemic-related claims subside. Since its pandemic-era low, Globe Life stock has rallied more than 110% as conditions in the life insurance market normalize.

However, Globe Life isn't the only long-term holding Berkshire Hathaway sold in the third quarter. Buffett and his team eliminated their stakes in General Motors, United Parcel Service, Mondelez International, Procter & Gamble, and Johnson & Johnson -- all of which had been in Berkshire's portfolio for a decade or more. After the sales, Berkshire Hathaway had a record $157 billion cash stockpile at the end of the third quarter.

Investors shouldn't be too concerned about Berkshire's selling

Despite Berkshire's selling, Globe Life continues to post solid results. Through the first three quarters of this year, revenue and net income were up 3.6% and 6.7% from last year, respectively, and it continues to post solid results in both its life and health businesses. The company continues to generate strong cash flow, earning $14.60 in free cash flow per share during the past 12 months.

It should also continue to benefit from higher interest rates on its investment portfolio. Last year, it saw the investment yield on its fixed maturity portfolio increase for the first time since 2008 and it should continue to benefit from tailwinds from the higher-for-longer interest rates. For that reason, Globe Life investors shouldn't be too concerned with Berkshire's recent sale of the life insurer's shares.

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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Markel Group. The Motley Fool recommends General Motors, Johnson & Johnson, and United Parcel Service and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

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