The lesson in Buffett’s winning Apple bet
Summary
The famed investor largely shied away from tech until his 2016 Apple bet. It turned out to be his greatest investment.Warren Buffett spent six decades building Berkshire Hathaway. But it was Apple’s CEO, he said, who delivered the conglomerate its biggest windfall.
“I’m somewhat embarrassed to say Tim Cook has made Berkshire a lot more money than I’ve ever made," Buffett said Saturday at Berkshire Hathaway’s annual meeting in Omaha, Neb. He closed the meeting with the surprise announcement that he is ready to step down.
The parting tip of the hat to Cook was classic Buffett—a nod to the humbling realities of the investing business and a reminder of the value of being willing to change one’s mind.
The Oracle of Omaha wasn’t big on technology bets in 2016, when he first bought shares in Apple. He and his investing partner, Charlie Munger, had generally stayed away from tech stocks, saying the two didn’t fully understand the fast-changing industry.
Apple turned out to be his greatest investment.
A Berkshire investment manager bought a small stake in the iPhone maker in 2016, nine years after its introduction. Around that time, Buffett asked another investment manager to find an S&P 500 stock that met three criteria.
Buffett wanted a company with a reasonably cheap price/earnings multiple of no more than 15, based on the next 12 months’ projected earnings, The Wall Street Journal previously reported. Berkshire managers had to be at least 90% sure that the stock would generate higher earnings over the next five years. And he wanted Berkshire to be at least 50% confident that the company would grow a minimum of 7% annually for at least five years.
The manager’s research pointed to Apple.
The stock was already a winner by then—and not a huge bargain. It traded for about 14 times its expected earnings, on the higher end of the range of what Buffett had been looking for. Some investors had sold after capturing gains.
And Buffett, a flip-phone user at the time, was hardly a techie. But he saw the hold the company had on its customers. Buffett’s grandchildren were iPhone devotees, and Apple’s customer retention rate was about 95%.
Berkshire initially purchased nearly 10 million shares worth about $1 billion and added to the holding in the coming years.
Berkshire owned about 2% of the company at the end of last year, making it a top five holder. Apple was the conglomerate’s largest holding at the time, followed by American Express and Bank of America.
Buffett has pared the stake significantly. Berkshire’s 300 million Apple shares at the end of last year—valued at $75.1 billion—represented just a third of the shares the conglomerate owned a year earlier.
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