Billionaire investor Warren Buffett is famous for making some smart and highly rewarding investments during his decades running Berkshire Hathaway. One of the most rewarding is one he did not even own a decade ago, Apple (NASDAQ: AAPL) stock. At the end of last year, that holding was worth around $156bn. That is a big position!
The 2021 Berkshire shareholders’ letter reported that the stake had cost $31bn and, by that point, soared in value to $161bn.
That is not all. Apple is a dividend payer, so Berkshire has earned billions of dollars in dividends along the way.
If Buffett continues to hold Apple, I expect those dividends will continue. Dividends are never guaranteed, but Apple is a free cash flow machine and I expect it to stay that way for the foreseeable future.
Spending $31bn on one share is a scale of investment private investors can only dream of (although Apple is a popular choice among private investors, albeit at a more modest shareholding size!).
But the stake soaring in price has actually created a potential problem for Berkshire and Buffett, in my view.
Dominant holding
The idea of an investment increasing in value by over $100bn does not sound like much of a problem. In fact, if anything, it is the sort of problem a lot of us would like to have!
In fact though, when a single share that is already a large part of a portfolio soars in price, it can end up occupying an outsized part of that portfolio.
Take Buffett’s Apple stock as an example. The stake now equates to around 43% of the total valuation of Berkshire’s share portfolio.
The perils of concentration
Why might that be a problem? All shares carry risks. Some are obvious when you buy them, but others can appear out of the blue (for the company, as well as its shareholders). Buffett, with his decades of investing experience, knows that as well as anyone.
Apple’s revenues fell last year. So too did its net income, although it still came in at an incredible $97bn.
But the falls indicate some of the challenges that face the tech titan as it aims to keep moving forward. Competitors could lure away customers, especially if a weak economy leads to more price conscious buying. Global supply chain challenges might also eat into profit margins.
What I’d do
Even if Buffett wanted to diversify his portfolio more, what could he do? Selling Apple stock (as he has done on a small scale in the past) could be read as a signal of waning confidence, hurting the value of his remaining shares.
But hanging onto them means tying 43% of his portfolio up in one company. Apple has been a great performer for Buffett. It is up 231% over the past five years. Over 12 months, though, it has moved up by just 3%. The price-to-earnings ratio is now 27. I see that as high.
I do like Apple’s strong brand, customer base and proven business model. But I would not buy Apple stock at its current price. Also, I would not have 43% of my portfolio tied into just one share.
