- Warren Buffett’s Berkshire Hathaway has bought ~$1Bn Apple stock and Mr. Market is surprised, rightly so.
- But investment in Berkshire is about putting your money in a group of companies that have been handpicked by Buffett himself.
- So what do you do with a company like Berkshire that has a great business model and an outstanding management team?
Last week, legendary investor Warren Buffett’s Berkshire Hathaway Inc (NYSE:BRK.A) disclosed that it has closed its position in AT&T (NYSE:T) by dumping 47 million shares in the first three months of this year but bought 9.8 million shares of Apple Inc. (NASDAQ:AAPL) which were valued at roughly $1.07 billion at the end of March. That was Berkshire Hathaway’s only new position taken in the first three months of 2016. The update, which surprised many Buffett followers, was analyzed to a great detail within hours. Some financial writers believe that Berkshire Hathaway seems to be losing its appeal. If Berkshire Hathaway has actually lost its touch, is this still a hold forever stock?
Berkshire Hathaway’s decision to load up on Apple stock is surprising since it shows that the company is doing exactly what Buffett and his long-time second-in-command Charlie Munger said that they themselves wouldn’t. For long, with the exception of IBM (NYSE:IBM), Buffett has expressed his dislike for investing in the technology space or in other industries that may grow at a fast pace because he found it difficult to value companies operating in such sectors. As early as 2012, in his annual letter to shareholders, Buffett said that he would rather stay on the sidelines with Apple. Similarly, in 2013, Charlie Munger said, while praising Apple’s achievements, that the tech giant was one of the most “un-Berkshire-like” companies on the planet.
Moreover, Berkshire Hathaway has loaded up on a company whose growth has come under pressure. Last month, Apple reported results for its second fiscal quarter (first calendar quarter) in which its sales dropped 12.8% from last year – that was the first revenue drop in 13 years. Moreover, the iPhone maker also said that current quarter revenues will drop by between 13% and 17%. The slowdown is partly due to the poor performance of iPhones released in 2015, which was in contrast to the blockbuster larger-screen models introduced in late-2014. Some of the weakness can also be attributed to the softness in global smartphone market which reported the first ever year-over-year decline in shipments in the first quarter, with volumes dropping 3% to 334.6 million units.
Still, Apple has demonstrated that it has a sustainable competitive advantage which is underpinned by a powerful brand, more than a billion devices currently being used and an array of services – such as iTunes – which keeps its consumers tied to its ecosystem. This allows the company to generate reliable cash flows every quarter. That’s something which Buffett might like, despite his aversion to tech companies.
However, if you’ve been closely following Berkshire Hathaway, then you would know that Buffett himself doesn’t make all the investment decisions. Almost five years ago, Berkshire Hathaway hired Todd Combs, who was a little-known hedge fund manager at that time. A year later, Ted Weschler, the renowned managing partner of Peninsula Capital Advisors, joined Berkshire Hathaway’s investment team. Both were hired to assist the Oracle of Omaha and eventually takeover Berkshire Hathaway’s enormous portfolio. The two have a total of $18 billion of assets ($9 billion each) under management. Buffett is known to give his money managers the freedom to make their own investment decisions, particularly when it comes to opening small positions, and this was evident from the latest update. Buffett has confirmed that he did not make the decision to buy Apple stock, which implies that either Combs or Weschler were responsible.
Although Buffett’s stock-picking lieutenants have put almost a billion dollars in Apple, it is still a very small part of Berkshire Hathaway’s enormous $129 billion equity portfolio. This brings us to an important point - investment in Berkshire Hathaway is not about Apple, but about putting your money in a portfolio which consists of some of the world’s most well-established companies that have been handpicked by Buffett himself. It’s about companies like IBM, Coca Cola (NYSE:KO), Kraft Heinz (NASDAQ:KHC), Wells Fargo (NYSE:WFC), and American Express (NYSE:AXP) that make up more than two-thirds of Berkshire Hathaway’s portfolio and almost three dozen other stocks which represent the remainder. With exposure to a variety of sectors, ranging from financial institutions to utilities to retail, Berkshire Hathaway is probably the most diversified large-cap conglomerate. Consequently, Berkshire Hathaway has minimum exposure to various business cycles. Generally, companies that operate in a single sector are at the mercy of their respective market. But in Berkshire Hathaway’s case, if one company in its portfolio performs poorly, then another usually picks up the slack. I believe that’s what makes Berkshire Hathaway an outstanding business.
That outstanding business has been built by a team of outstanding management, with Warren Buffett at the top aided by Charlie Munger. But this company is also about Ajit Jain who has virtually built Berkshire Hathaway’s highly successful reinsurance business from scratch, Gregory Abel who is leading the company’s increasing exposure in energy and power sectors, and Buffett’s stock-picking protégés Todd Combs and Ted Weschler. Their Apple pick doesn’t look great considering the company’s recent performance, but I think it’s actually a smart move. If the company’s investment in the tech giant goes south, if, for instance, a competitor emerges out of nowhere and destroys Apple, then it won’t have any meaningful impact on Buffett’s company. Why? Because Apple represents less than 1% of Berkshire Hathaway’s portfolio. But if Apple begins to climb, driven by, say, a turnaround in China or strength in India or Apple Watch, then Berkshire Hathaway will gladly take the profits.
So what do you do with the stock of a company like Berkshire Hathaway that has a great, diversified business model and an exceptionally talented management team? You ignore the market’s noise and continue holding that stock forever. I believe that’s exactly what Warren Buffett would do.
P.S. “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever” – Warren Buffett (1988).