Few investors are as revered on Wall Street and among the investing community as Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett. Although Buffett has actually underperformed the benchmark S&P 500 on a trailing 10-year basis, his track record over the really long-tem (55 years) speaks for itself.
According to Berkshire Hathaway's annually released shareholder letter, the S&P 500 has gained 19,784% over the past 55 years, inclusive of dividend payments. However, Berkshire Hathaway's per-share market value has increased 2,744,062% over the same period. This more than 2,700,000% whooping Buffett has put on the S&P 500 is the result of his stock-picking prowess and his patience to see his investment thesis play out over time.
The Oracle of Omaha has never been big on diversification
But one thing Buffett is not is an investor that necessarily believes in diversification. In the Oracle of Omaha's words, "diversification is protection against ignorance." In other words, if you know what you're doing as an investor, there's no need to diversify your portfolio beyond a few core businesses.
It's not been uncommon in recent years to find instances where Berkshire Hathaway has had more than 80% of its invested assets in three sectors, or where close to two-thirds of the company's invested assets are tied up in four or five companies. But given the unprecedented volatility that's occurred in 2020 due to the coronavirus disease 2019 (COVID-19) pandemic, these concentrations have really been thrown out of whack.
Right now, one stock -- Apple (NASDAQ:AAPL) -- comprises a whopping 43% of Warren Buffett's portfolio. As of this past week, Berkshire Hathaway's position in Apple had grown to $91.3 billion, which compares to $213.6 billion for the company's entire 46-security investment portfolio. Put in another context, Apple's influence on Buffett's investment portfolio is greater than every other equity stake, combined, with the exception of Berkshire's No. 2 holding, Bank of America.
How has Apple grown into such a huge component of Buffett's investment world? Part of the answer lies with the Oracle of Omaha's investment strategy, while the other component can be tied to Apple itself.
Buffett's investment strategy has vaulted Apple to Berkshire's core holding
The thing you need to understand about Buffett is that he loves companies with sustainable competitive advantages, sound branding, and a strong management team. Apple brings all three to the table.
Look outside any Apple store prior to the release of a new iPhone, and you'll understand the power of its brand. Apple is a dominant player in the U.S. smartphone market, with GlobalStats' data for June 2020 showing that the company controlled better than 58% of mobile vendor market share. No matter what products Apple puts out, there's an almost cult-like following of consumers that'll be in line to buy it. Its brand has lasting power, and that's what initially attracted Buffett to Apple in 2016.
As noted, there's also the Tim Cook factor. Apple's CEO has masterfully managed the company in the nearly nine years since Steve Jobs suddenly resigned his post due to health reasons. Over that time frame, and inclusive of dividends paid, Apple's stock has appreciated by a cool 688%. I doubt much that any of the company's shareholders are complaining.
And don't forget about Apple's shareholder return program. Apple has been willing to borrow money at exceptionally low rates in order to repurchase its own stock, which is a strategy that Buffett fully endorses.
Apple has run circles around the broader market, too
But this isn't a story about Buffett simply buying-and-holding a great company. It's also just as much about Apple completely running circles around the S&P 500 and a broad swath of other publicly traded tech stocks.
One reason Apple has been such a stud is Tim Cook's leadership in helping to push Apple away from its historic reliance on product revenue. While smartphones, Macs, and tablets still comprise the lion's share of Apple's revenue, we've witnessed faster growth rates from Apple's services and wearables segments. These high-margin operations, which have been delivering double-digit growth, are the future for Apple, and will help the company experience less lumpiness in its quarter-to-quarter sales.
Another reason Apple's market cap continues to defy gravity is the company's innovation. Beyond just being dominant in the smartphone arena, Apple has been on the leading edge of a number of once-hot or still-hot technologies, including tablets and smartwatches. Even if not all of Apple's innovations prove successful or profitable, they serve a purpose of attracting new consumers to the brand. And as noted earlier, few companies have the branding lure that Apple offers. Once these consumers are within Apple's ecosystem of products and services, they're liable to stay there for a long time to come.
Yes, it might be a bit surprising to see Apple represent such a large piece of Warren Buffett's investment portfolio, but that's merely a function of Apple's outperformance in recent years and Buffett's willingness to never sell great businesses.