It's always interesting when a major executive at a big company makes a large open-market purchase or sale. But it's especially notable when executives at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) make a big move.
Last Monday, Berkshire Vice Chairman Ajit Jain sold $139 million of Berkshire stock, which is good for over half his entire stake in the company.
Is Jain's sale a warning, and should Berkshire investors follow suit?
Ajit Jain's historic 38-year career
Ajit Jain has run Berkshire's most important business for the past 38 years. Brought on in 1986 to take over Berkshire's insurance operations, Jain has been praised by Warren Buffett as even more important to Berkshire than Buffett himself. This is because insurance is so key to Berkshire's operations. Not only is it a key operating segment, but the insurance float generated 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 of value for Berkshire shareholders. If there were ever to be another Ajit and you could swap me for him, don't hesitate. Make the trade!"
Jain was subsequently named vice chairman in 2018 alongside Greg Abel, who is now deemed to be Buffett's successor as CEO when Buffett steps down. That's a title granted only to Jain, Abel, and the late Charlie Munger.
Therefore, it's notable that Jain cut over half his stake. On Monday, Sept. 9, Jain unloaded 200 Berkshire Class A shares at $695,418 per share. He still holds another 116 shares between direct holdings and family trusts, and his charitable organization, the Jain Foundation, holds another 50 shares.
So should Berkshire shareholders be worried at the share 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 be retiring soon
While one doesn't know about the personal lives of Berkshire's executives, it's possible Jain plans to retire soon. He's 73 years old, and overseeing one of the largest insurance companies in the world with $169 billion in annual float is a taxing full-time job.
Berkshire Hathaway no doubt has lots of talent within its insurance ranks, bolstered through notable acquisitions in recent years. Berkshire acquired specialty insurer Alleghany Insurance in 2022, and more recently bought a large stake in Chubb (NYSE: CB) , a premier insurance brand. While Berkshire's Chubb stake amounts to only 6.4% at this point, some have pondered that Chubb would make an excellent acquisition for Berkshire, too.
Image source: The Motley Fool.
Valuation and taxes may have also nudged Jain
Even if Jain wasn't thinking of retiring right away but perhaps in the next five years, now might have been a good time to take some chips off the table for two reasons: Berkshire's recent valuation surge, and the prospect of higher capital gains and/or corporate taxes in the future.
On the valuation front, Berkshire's market cap recently eclipsed the monumental $1 trillion mark for the first time. The recent surge has partly been due to margin expansion. Berkshire's price-to-book ratio recently traded at a 10-year high, above 1.6 times. While not especially expensive for an insurance-based stock, the valuation is a decade-long high for Berkshire.
BRK.A Price to Book Value data by YCharts
And if one were thinking of selling any stock in the next few years, now might be a good time to do it 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 large recent sale of Apple (NASDAQ: AAPL) .
Buffett believes higher future taxes are likely given the current U.S. debt and deficit. Of note, Berkshire's stock sales would be affected by the corporate tax rate, which was lowered from 35% to 21% in the 2017 Tax Cuts and Jobs Act. But many provisions of the law expire in 2025. While neither party wants to raise the rate back to 35%, it's possible that rate goes higher than 21% after negotiations.
There is also talk of raising the top capital gains rate for individuals, which would affect Jain. The current rate on high earners is 20%, but Vice President Kamala Harris is proposing raising that to 28% for those making over $1 million per year. In addition, she's proposing raising the net investment income tax on those with capital gains over $200,000 annually from 3.8% to 5%.
So if all these proposals were to go 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 this is to say that Jain's sales were likely due to a combination of personal circumstances, Berkshire's valuation at the higher end of normal, and tax considerations.
Still, if one 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 one shouldn't be invested in Berkshire if one doesn't have confidence that Abel and younger investment managers Todd Combs and Ted Wechsler will 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 within the next five years, now may be a prudent time to trim your stake, as Jain did.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein and/or his clients have positions in Apple, Bank of America, 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 .
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