Buffett to Apple: It's Not You, It's Me

The Berkshire Hathaway shareholders' meeting in Omaha last Saturday.

Apple stock has been Berkshire Hathaway's largest and most successful investment in Warren Buffett's storied history. [bold added]

Apple is Warren Buffett’s greatest investment. It has also become one of his riskiest.

In 2016, Buffett made perhaps the most surprising bet of his career. That year, Berkshire Hathaway, the company he runs, began buying up shares of Apple—the exact kind of stock Buffett and his longtime partner, Charlie Munger, had long avoided...

Yet working with protégés, Buffett soon transformed into an Apple bull in a remarkable about-face. After an initial purchase of nearly 10 million shares worth about $1 billion in 2016, Berkshire added to its holdings later that year and then stepped up its buying in 2017 and 2018, spending about $36 billion on the stock over those years. Berkshire later trimmed some of those holdings.

By the end of the third quarter of 2018, Berkshire’s Apple stake represented about a quarter of its entire investment portfolio. In dollar terms, it was twice as large an investment as Buffett had previously made.

The move has paid off, in a very big way. Today, Berkshire’s 5.9% stake in Apple is worth about $157 billion, even though Apple has fallen lately. Berkshire is sitting on about $120 billion in paper gains, likely the most money ever made by an investor or a firm from a single stock. Nothing in Buffett’s long career comes close. Apple stock represented nearly 50% of Berkshire’s stock portfolio at year-end.

Warren Buffett has never followed hard-and-fast rules for portfolio diversification. Many portfolio managers would sell an individual stock if its value exceeded, say, 10% of their portfolio, but Warren Buffett rode a seven-year wave until Apple equalled nearly half of Berkshire's $370 billion stock holdings.

At that point no one would criticize Warren Buffett for trimming his position, which he did in the first quarter. He announced his action in last Saturday's Berkshire shareholders meeting, all the while continuing to praise Apple:

Warren Buffett is still a big fan of Apple.

The legendary investor praised the iPhone maker on Saturday from the stage of his annual meeting, even after revealing that Berkshire Hathaway had slashed its stake in the first quarter. He hinted that tax considerations may have played into the decision.

Buffett told an arena of Berkshire shareholders that Apple is “an even better business” than American Express and Coca-Cola, two other big positions in his company’s massive stock portfolio.

Berkshire sold about 13% of its mammoth stake in Apple in the first months of 2024, leaving it with $135.4 billion of the iPhone maker’s shares at the end of March, according to a regulatory filing released Saturday morning.

He really didn't have to justify the sale, but what was the reference to "tax considerations"? Was there some esoteric tax rule that applied to unbalanced insurance company investments?

No, Mr. Buffett was simply referring to the likelihood that the Federal government, facing unprecedented deficits and unwilling to cut spending, will soon raise the long-term capital gains rate from 21%. (He elaborates on YouTube.)

We don’t mind paying taxes at Berkshire , and we are paying a 21% federal rate on the gains we’re taking in Apple. That rate was 35% not that long ago and has been 52% in the past when I’ve been operating. The Federal government owns a part of the earnings of the business we make. They don’t own the assets but they own a percentage of the earnings. They can change that percentage in a year and the percentage is currently 21%, and I would say that with the present fiscal policies I think that something has to give and I think that higher taxes are quite likely, and if the government wants to take a greater share of your income or mine or Berkshire’s, they can do it.

They may decide that someday they don’t want the fiscal deficit to be this large because that has some important consequences and they may not want to decrease spending a lot and they may decide they’ll take a larger percentage of what we earn, and we’ll pay it. We always hope at Berkshire to pay substantial Federal income taxes. We think it’s appropriate that a country that has been as generous to our owners—Berkshire was lucky that it was here—and if we sent in a check like we did last year, we sent in over $5 billion to the US Federal government—and if 800 other companies had done the same thing no other person in the United States would’ve had to pay a dime of Federal taxes [applause], whether income taxes, no Social Security taxes, no estate taxes, all down the line. I hope things develop well enough with Berkshire—we say we’re in the 800 club [companies with a market capitalization of at least $800 billion]-- and maybe even move up a few notches. It doesn’t bother me in the least to write that check, and I would really hope with all that America has done for all of you, it shouldn’t bother you that we do it, and if I’m doing it at 21 percent this year and we’re doing it at a lot higher percentage later on, I don’t think you’ll actually mind the fact that we sold a little Apple this year.

Far be it for me to argue with Warren Buffett, but his statement that no one would pay any taxes if 800 companies paid $5 billion to the Treasury is technically true, but fantastical. Excluding banks, who need multi-$billions to conduct operations, there are fewer than 50 companies that have at least $10 billion on hand. (It's like saying that if everyone had an EV there would be no climate crisis.)

However, the Oracle of Omaha is very likely to be correct in his prediction that the government is unwilling to cut spending and will raise taxes in the near future. At 93, Warren Buffett talks about the way things are, not the way he wishes they could be.