"Too much of a good thing can be wonderful."
- Mae West
Warren Buffett, who often quoted Mae West, has always believed in a concentrated portfolio, often stating that, "diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."
Berkshire's investment in Apple (AAPL) is a bold manifestation of his avoidance of portfolio diversification which has characterized his investing style for over five decades... it is the largest investment that Berkshire (BRK.A) (BRK.B) has ever made and, by far, the most profitable (on a time-adjusted or absolute dollar basis) of any investment portfolio position he has made.
On an initial investment of $36 billion, Berkshire has made approximately $43 billion. Almost all of that gain is unrealized and has been achieved in the last 12 months!
It can now be argued that, in both time (brief) and amount (huge), Berkshire Hathaway's purchase of more than 255 million Apple shares was the single greatest investment ever made of a publicly listed company in history and by far, the most consequential investment of a listed company that Buffett has ever made. That's saying a lot for the 89 year old Warren Buffett who has compounded money at almost a +20% annual rate of return over more than half a century!
However, given the sheer success (and size) of Buffett's investment in Apple, we must now question whether Berkshire Hathaway should or will sell a large portion of their Apple shares.
I believe he will.
Let me explain... but before I do, I first wanted to chronicle the history behind this enormously successful investment made by Berkshire Hathaway in Apple.
* Berkshire Hathaway first disclosed the purchase of 9.8 million shares of Apple (at the time it was worth a bit more than $1 billion) in a 13F filing with the SEC on May, 16, 2016. (Buffett later confirmed on CNBC that either Todd Combs or Ted Weschler - his two investment managers - made the investment).
* Since the original 9.8 million share investment was disclosed, Warren Buffett piggybacked his managers and, by the end of 2018, Berkshire Hathaway owned 255.3 million shares at a cost of about $36 billion ($141/share).
* In a 13F in late November, 2018, Berkshire Hathaway announced it sold 2.9 million shares of Apple. At the time the sale was generally believed to have been sold by Todd or Ted in order to make room for some other investment.
* In an interview with CNBC in February, 2019 (following a first quarter warning and after a -20% share price drop from September, 2018) Warren Buffett declared that Apple's shares were too expensive to purchase at the then current level of $175/share. ("If it were cheaper, we'd be buying it. We aren't buying it here.")
* In a 13F in late November, 2019 Berkshire Hathaway announced it sold an additional 750k shares of Apple.
* Apple's shares closed at about $166/share on December 31, 2018 - providing an unrealized gain of approximately $4.2 billion.
* Apple's shares closed at $300/share on December 31, 2019 - and the estimated unrealized gain grew to about $38 billion.
* Apple's shares closed at $318/share last Friday - increasing the estimated unrealized gain to almost $43 billion.
By expressing enough confidence to make Apple (at a cost of $36 billion and by far its largest investment of a publicly held company), Berkshire Hathaway has reaped over $43 billion of gains. As less than four million shares have been reportedly sold, almost all of the gains are unrealized.
To the best of my knowledge this is the most substantial dollar return of any investment made by any entity of a publicly held company in history. It surely is the greatest time-adjusted return (with most of the gain achieved in the last 12-13 months).
Which brings us to the risks associated with how large Berkshire's Apple investment is relative to other investments, total Berkshire book value, etc.
At year end 2018, Berkshire Hathaway had over $40 billion committed to Apple's shares (with an unrealized gain of $4.2 billion) - compared to about $20 billion in long held positions in each of Bank of America (BAC) , Wells Fargo (WFC) and Coca-Cola (KO) . The unrealized gains in Bank of America and Wells Fargo are about $10 billion each and with Coca-Cola of about $17 billion.
But, Berkshire's gain in Apple has catapulted from $4.2 billion at the end of 2018 to over $43 billion today (as of Friday's closing price of $318/share) and the total investment value of its Apple holdings is about $80 billion, compared to its second largest portfolio holding (Bank of America, worth only about $30 billion).
The $80 billion marked to market investment in Apple is almost 15% of Berkshire Hathaway's market capitalization of $555 billion and represents 23% of Berkshire's shareholders equity.
As measured against Berkshire's year end 2018 investment holdings, $80 billion in Apple shares would represent 46% of its $172 billion portfolio of 13 months ago. Assuming an estimated rise of about $55 billion in value of that total investment portfolio (with almost $40 billion from Apple's share price appreciation alone), Berkshire's Apple holdings likely represent approximately 35% of Berkshire's entire investment positions.
Put another way, it took Berkshire decades to realize a $18 billion unrealized gain on its $1.2 billion investment in 9.4% of Coca-Cola.
It took Berkshire only about one year to realize a $40 billion unrealized gain on its $36 billion investment in 5.4% of Apple!
To me, Warren Buffett has put an explanation point on his remarkable investing career with his spectacular investment in Apple.
Consider that The Oracle is currently 89 years old - and that he made his single best portfolio investment in over a half century at 87 years old!
This is truly amazing and testimony to his investing genius.
But, too much of a good thing (Apple) may no longer be wonderful for Berkshire Hathaway as the Apple position has a dramatically outsized size relative to a number of Berkshire metrics (market capitalization, shareholders equity and investment portfolio size).
For these reasons I say Berkshire will reduce its $80 billion invested in Apple - and that possible move may not be interpreted positively by other investors.
(Apple is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL? Learn more now.)
(This commentary originally appeared on Real Money Pro on January 27. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)