Few investors are as revered on Wall Street and among the investment community as Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett. Although Buffett has really underperformed the benchmark S&P 500 on a 10-year basis, his very long-term record (55 years) speaks for itself.
According to the letter released annually by Berkshire Hathaway shareholders, the S&P 500 has gained 19.784% in the past 55 years, including dividend payments. However, the market value per share of Berkshire Hathaway increased 2,744,062% during the same period. This more than 2,700,000% fervor that Buffett has put into the S&P 500 is the result of his skill in stock selection and his patience to see his investment thesis over time.
Berkshire Hathaway CEO Warren Buffett at his company’s annual shareholder meeting. Image source: The Motley Fool.
The Omaha oracle has never been great in diversification
But one thing that Buffett is not is an investor who necessarily believes in diversification. In the words of the Omaha Oracle, “Diversification is protection against ignorance.” In other words, if you know what you are doing as an investor, there is no need to diversify your portfolio beyond a few core businesses.
It has not been uncommon in recent years to find cases where Berkshire Hathaway has had more than 80% of its assets invested in three sectors, or where nearly two-thirds of the company’s invested assets are tied up in four or five companies. But given the unprecedented volatility that occurred in 2020 due to the 2019 coronavirus disease pandemic (COVID-19), these concentrations have really been lost.
At this time, an action – Apple (NASDAQ: AAPL) – comprises a whopping 43% of Warren Buffett’s portfolio. As of last week, Berkshire Hathaway’s position at Apple had grown to $ 91.3 billion, compared to $ 213.6 billion for the company’s entire portfolio of 46 securities. In another context, Apple’s influence on Buffett’s investment portfolio is greater than any other shareholding, set, with the exception of Berkshire’s number 2 tenure, Bank of America.
How has Apple become such a large component of Buffett’s investment world? Part of the answer lies in the Omaha Oracle’s investment strategy, while the other component may be tied to Apple itself.
Image source: Getty Images.
Buffett’s investment strategy has propelled Apple to Berkshire’s primary stake
What you need to understand about Buffett is that he loves companies with sustainable competitive advantages, a strong brand, and a strong management team. Apple brings all three to the table.
Look outside any Apple store before the launch of a new iPhone, and you’ll understand the power of your brand. Apple is a dominant player in the U.S. smartphone market, with GlobalStats data from June 2020 showing that the company controlled more than 58% of the market share of mobile device providers. Regardless of the products Apple presents, there is an almost cultured consumer following that will be online to buy it. His brand has lasting power, and that’s what initially drew Buffett to Apple in 2016.
As noted, there is also the Tim Cook factor. The Apple CEO has masterfully managed the company in the nearly nine years since Steve Jobs suddenly resigned from his position for health reasons. During that time period, and including dividends paid, Apple shares have appreciated 688%. I highly doubt that any of the company’s shareholders is complaining.
And don’t forget Apple’s shareholder return program. Apple has been willing to borrow money at exceptionally low rates to buy back its own shares, which is a strategy that Buffett fully supports.
Apple CEO Tim Cook. Image source: Apple.
Apple has also circled the general market
But this is not a story about Buffett simply buying and maintaining a great company. It’s also so much about Apple completely circling the S&P 500 and a wide swath of other publicly traded tech stocks.
One of the reasons Apple has been so important is Tim Cook’s leadership in helping move Apple away from its historical dependence on product revenue. While smartphones, Macs, and tablets still account for the lion’s share of Apple’s revenue, we have witnessed faster growth rates for Apple’s services and portable device segments. These high-margin, double-digit growth deals are the future for Apple and will help the company experience fewer bulges in its quarterly sales.
Another reason why Apple’s market capitalization continues to defy gravity is the company’s innovation. Beyond being dominant in the smartphone arena, Apple has been at the forefront of a number of technologies that were once fashionable or still hot, including tablets and smartwatches. Even if not all Apple innovations are successful or profitable, they serve to attract new consumers to the brand. And as noted above, few companies have the brand appeal that Apple offers. Once these consumers are within Apple’s ecosystem of products and services, they are likely to remain there for a long time.
Yes, it may be a bit surprising to see Apple represent such a large part of Warren Buffett’s investment portfolio, but that is simply a function of Apple’s superior performance in recent years and Buffett’s willingness to never sell big business.
