The Apple of Warren Buffett's Eye
Warren Buffett’s investing record doesn’t provide a whole lot of openings for his critics. Starting with his A+ in Benjamin Graham’s1 class at Columbia in 1951, Buffett has spent most of his career as a kinder, gentler King Midas — earning riches for family and friends through his limited partnership and, then, transforming Berkshire Hathaway from a dying textile business into one of the most valuable (and admired) companies in the world.
With his folksy sayings and grandfatherly advice on life and investing (along with lots and lots of Cherry Coke), Buffett has also dispelled the notion that success in the stock market means becoming a Gordon Gekko or Bobby Axelrod.
When Buffett does come in for criticism, though, it’s usually for his aversion to technology stocks. His reasoning was always sound enough — he simply didn’t understand these companies and, if he couldn’t understand them, he wasn’t buying. The uncertainty and unpredictability inherent in the tech industry ran counter to his entire investing philosophy of looking for one-foot bars to step over rather than trying to nail the high jump.
Over the years, Buffett explained this many, many times:
I know about as much about semiconductors or integrated circuits as I do the mating habits of the chrzaszcz2. We will not go into businesses where technology, which is way over my head, is crucial to the investment decision.
As citizens, Charlie [Munger] and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country’s standard of living to rise, and that’s clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude to space exploration: We applaud the effort, but prefer to skip the ride.
If I taught a class, on my final exam, I would take an Internet company and ask [the students], “How much is this company worth?” Anyone who would answer, I would flunk.
These Buffett-isms did little to sway the True Believers of Technology. And, in the late 1990s, that was just about everyone. All a company had to do was add Net or .com to its name and hundreds of millions of dollars poured in.
Buffett was even (politely) derided by many of his own shareholders for falling behind the times and being out of touch. The very people he had turned into millionaires were siding with the Silicon Valley tech bros over the slow-and-steady Oracle of Omaha. Such is life in the money game.
Spoiler alert: Warren Buffett was right. Again.
Tech stocks were wildly overvalued with the stability of quicksand. The Dotcom Crash swept over the market with Old Testament-level vengeance. Investors “with the times” and “in touch” lost their shirts. And Berkshire Hathaway shareholders were left to sheepishly thank Buffett for keeping them out of harm’s way.
Even then, that criticism merely went into hibernation. Any time Berkshire Hathaway failed to beat the S&P 500 — no matter how many times it had won before — naysayers poured forth from the woodwork with cries of Dinosaur! and Past His Prime!
So, imagine everyone’s surprise when Buffett started buying Apple stock a few years ago. He jumped in at a split-adjusted price of $27 per share and continued adding and adding and adding. By 2018, Berkshire Hathaway owned more than 5% of the Cupertino giant.
Well, for one thing, Buffett didn’t see $AAPL as a run of the mill tech stock. Instead, he saw a company that had practically become a consumer staple. While tech companies of yore could be upended and completely displaced in no time flat by new competition, Apple had customers who were very unlikely to switch brands just because of lower prices or fancier bells and whistles.
“Apple has an extraordinary consumer franchise,” Buffett said. “You are very, very, very locked in, at least psychologically and mentally, to the product you are using. [iPhone] is a very sticky product.”
Plus, Apple’s halo effect is the stuff of legends. Once customers purchase an Apple product — usually an iPhone3 — they are much more likely to stay within the Apple ecosystem. iPhones lead to iPads and Macs and AirPods and on and on. If earlier tech companies didn’t have much margin for safety, Apple’s moat was a mile wide.
And, as The Conservative Income Investor points out, the tendency for today’s tech giants to stockpile cash affords them far greater leeway to buy up the competition and fend off danger that way. In 2019, Apple CEO Tim Cook said that they acquire another company every two or three weeks.
More than anything, though, Apple was just a classic Buffett value play. $AAPL was trapped in a malaise in the mid-2010s because everyone was worried that iPhone sales were slowing down. When Buffett made his move, Apple traded at just 11x earnings. That’s the kind of valuation more often found on a staid, low-growth business.4 Not the creator of the iPhone.
In hindsight — and, really, it should have been obvious to all of us at the time — Apple was ridiculously cheap. And Buffett pounced.
It’s worked out pretty well. Earlier this year, $AAPL briefly became the first U.S. company to reach a $3 trillion market cap. That means Buffett’s stake in Apple has earned $120 billion in profit so far and, with Apple aggressively buying back its stock, Berkshire Hathaway’s position gets bigger and bigger each quarter.5
Not bad for a technophobic dinosaur.6
The father of value investing.
The Polish word for “beetle”.
For me, it was the iPod Photo in 2005. I’m old.
Think Campbell Soup.
In the not too distant future, Berkshire could own 10% of Apple.