Ajit Jain sells large chunks of his Berkshire Hathaway shares: A signal for a broad exit?

Ajit Jain, long-time head of the insurance division at Berkshire Hathaway, recently sold more than half of his shares for $139 million – the largest sale since he joined the company in 1986. This sale coincided with a new record high for Berkshire's Class A shares at $715,910, marking a market capitalization of over $1 trillion for the first time. The value of the shares has since decreased by 4% and is now around $990 billion. The question arises: should one follow Jain and sell their shares now? Jain did not publicly comment on his large-scale stock sale, but several plausible explanations come to mind. At 73, he might be preparing for a forthcoming retirement. Jain was once considered a potential successor to Warren Buffett, but Buffett plans to pass the reins to Greg Abel, who currently oversees Berkshire's energy and non-insurance divisions. Buffett, who celebrated his 94th birthday last month, could also retire soon. Jain and other long-time investors might view this period as the end of an era and see it as an opportunity to liquidate their holdings. Furthermore, Jain might view Berkshire's shares and the overall market as overvalued. The stock has more than doubled in the last five years and is now trading at 26 times last year's operating income – a metric that Buffett favors. Five years ago, this value was 21 times. The S&P 500 is also historically expensive and trades at 22 times expected earnings. This could also be a reason why Berkshire is increasingly selling its top stocks like Apple and Bank of America and accumulating more liquidity. However, Jain's sale does not necessarily mean that Berkshire's business is in trouble. It could simply be personal decisions or the view that the short-term profit potential is limited. Last year, 40% of Berkshire's operating results came from the insurance and investment division, while the remaining 60% came from other subsidiaries in the fields of railroads, utilities, energy, and consumer goods. These operating results do not include the gains or losses from the closely watched stock portfolio, which includes over 50 stocks and ETFs, as these numbers can fluctuate significantly from year to year. Berkshire's main strategy is to generate fresh capital for the investment portfolio through its core businesses. This strategy is successful because the core subsidiaries are cash-rich companies and Buffett has a knack for picking long-term successful stocks. Although some doubt whether Berkshire can continue to make the right investments without Buffett, his successors will likely stick to the proven strategy and focus on value-oriented blue chips. Berkshire's growing insurance division was able to offset the macroeconomic challenges of the non-insurance businesses in 2023, leading to a 21% increase in overall operating results. With declining interest rates, non-insurance businesses could grow faster this year. At the end of the second quarter of 2024, Berkshire held a record $276.9 billion in cash and equivalents – clear signs that the company is well-prepared for future investments and acquisitions in a possible market correction. Berkshire Hathaway has consistently outperformed the market, and there is little reason to believe this will change soon. Jain’s sale suggests the stock price might reach a short-term high, but long-term larger gains are still expected. Investors should worry less about insider sales and stock price fluctuations and appreciate the company’s diversification and flexibility.