Over the last few years the stock market has been driven by the large technology companies in the Magnificent 7. Investors who didn’t hold these stocks have lagged the market, which has been a real challenge especially for value investors.
It’s worth remembering, and something I didn’t mention it in my post on Warren Buffett stepping down as CEO, that Berkshire Hathaway has held a significant position in Apple since 2016. At its peak, Berkshire’s Apple stake was worth about $181 billion. While Berkshire has sold shares since then, the position still stands at around $75 billion today.
Buffett steeped in the Benjamin Graham school of value investing (see The Intelligent Investor) had already evolved by the 1970s into investing in high-quality businesses like Coca-Cola, American Express, and others. Famously, he stayed away from technology companies for decades, considering them outside his circle of competence.
When Berkshire began acquiring Apple shares, the company wasn’t valued highly as it is today. According to the Wall Street Journal, Apple met the criteria of a price-to-earnings ratio below 15, strong confidence in growing earnings over the next five years, and reasonable expectations of steady sales growth.
Today, Apple trades at a P/E of nearly 32, with annual revenue growth of just a few percentage points over the past three years and largely flat earnings. It’s not surprising, then, that Buffett has been selling down his position rather than adding to it.
That Buffett chose Apple and not, for example, Tesla or Nvidia does show that he stayed true to his core principles even when investing in a Magnificent 7 company. Valuation remained critical and Apple’s capital allocation (with dividends and aggressive share buybacks) was likely a key factor. Apple’s exceptionally high customer retention, especially for the iPhone, was probably a strong indicator of franchise strength.
Had Buffett, together with Charlie Munger, not first evolved toward investing in great businesses, and later extended that approach to include technology companies like Apple, Warren Buffett’s track record and legacy would look very different today.
