Warren Buffett's Berkshire Hathaway Takes $1B Position in Apple | Hacker News Reader

Warren Buffett's Berkshire Hathaway Takes $1B Position in Apple

wsj.com

358 pointsstevenj252 comments

[edit]Disclosure - I am a Berkshire Hathaway investor and more intense than average follower of the company and it's top management.[/edit]

This is almost certainly a bet by Ted Weschler or Todd Combs - Buffett's chief investing lieutenants.

Buffett has maintained his aversion to tech as he doesn't "understand"[1] it, and I see nothing to indicate he's changed his mind at this stage in the game.

Also - a $1bn investment is relatively small change for Buffett, but fits squarely within the size range of Ted and Todd's reported $8-10b (each) investment warchest.

[1]: Not "understanding" doesn't mean he doesn't or couldn't understand the technology aspects; rather, it means he doesn't have the ability to see which of the participants will survive and thrive in 10 years time to justify an investment today. IBM is a notable exception.

I suspect that IBM fits his understanding because he views it as a services company, rather than a hardware or software company. Services he does understand. I think he also likes that they give most of their cash back to the shareholders. (Which makes them a value play rather than a growth play) I was still surprised by the investment though.

Agree on these points. Also, across the dozens of businesses fully owned by Berkshire Hathaway, he has unique insight into the tech vendors that those businesses rely on. The rumor is that he polled a significant portion of the managers of these businesses which helped to inform his decision that IBM would be around for a long, long time.

Interesting. The challenge is that tech companies can become obsolete very quickly. I don't think IBM is as sticky as he gives them credit for.

This is funny because IBM is the best possible example of a sticky tech company. The company was originally founded in 1911 and made punch-card-operated tabulating machines.

Indeed, but I don't people are as locked in their services as they used to be. They've been resiliant, but it isn't like the 80s or 90s when a decision to buy IBM was a 20 year commitment.

Now the decision to buy IBM is more around software and services. Outsourcing contracts have long lives, but software and implementation less so.

This is where the Growth investor looks at something different than the Value investor. The growth investor says, "They're technologically irrelevant. They're still hawking Lotus Notes!" [0] The value investor says, "Their PE is 11, and they're buying back every share in sight." [1]

[0] http://www-03.ibm.com/software/products/en/ibmnotes

[1] http://www.google.com/finance?cid=18241

I'm not overly familiar with IBM Global Services, but from the contact I've had with them in the enterprise world I think you're undervaluing the stickiness substantially. For context, if I'm looking at the right numbers, IBM has ~USD$80B in revenue with ~USD$60B from services?

IBM realized a while ago that the actual machines were replaceable, but the expertise needed to do integration on the scale they operate at less so. And given the poor success rate of major upgrade/integration projects, I expect "hire IBM" is still a fairly safe decision at the C/VP level. Whether legacy enterprises* are running mainframe or fail-tolerant distributed infrastructures, most of them are more than happy to throw money at someone to reliably turn the crank and keep them working.

Edit Side note: Does Amazon actually not have a services org to build on top of AWS? Seems like they could create one just from IBM layoffs and start helping some of these sorts of customers migrate to AWS.

*Excludes the vast majority of companies mentioned on HN

Amazon has pop-up lofts (though, the one I've seen was in a very fixed looking building) where you can consult with Architects or take various technical workshops.

Considering they do $60B worth of business in services, and given the poor success rate of major upgrade/integration projects, I'd say IBM is one of the culprits here.

I'm a BH investor, and frankly I don't like them going into this space.

IBM is dying, http://www.cringely.com/2016/03/08/whats-happening-at-ibm/

I hope their Apple purchase isn't an indicator of the same.

Yeah that guy wrote a book about how IBM is dying a few years ago and ever since then keeps writing blog posts about it.

Whether it is dying or not I would not listen to him.

A behemoth like IBM takes a while to die. I've read a bit about IBM. They are toast, the market for mainframes, server racks and expensive enterprise service packages is disappearing.

Except watson, patents, their financing arm, 99 year contracts with governments globally...

... Have you ever tried to use Watson for anything?

The aspect of dying is a forward looking thought which presumes that growth has ceased within the organization and the best they can do is to maintain their current state. I think that's a fairly accurate depiction of IBM's business although the recent performance notes I've seen of the Power chipset with PG_SQL are pretty encouraging.

I estimate about 60% of IBMs patents are invalid after the recent Alice v. CLS Bank decision. Just no one has call them out on it yet.

Read history, whenever an industry gets too distasteful for IBM they sell it. E.g. Desktops/Laptops and more recently servers to Lenovo. The products might be supported by a lot of services, a mainframe might not be cheap but nor are mainframe consultants. A lot of large corporates still use mainframes and some probably have no plans to get rid of them.

Edit: Grammar mistake

IBM is a master at reinvention. They regularly discard unprofitable businesses and expand into profitable ones. In 2014, they disposed of businesses representing $7b in revenue but -$500m in profit.

Managing to the future by getting rid of the dead weight is the only way you can survive to be a 100+ year old company in the technology space.

Yeah but of the 75mill iphone sold per quarter, how much are to old customers and new?

Be careful! at 95% world-wide saturation for smartphones the answer is very different now than it was in 2009...

Apple is not even close to the #1 selling smartphone in China or India, both with the largest populations on Earth. So I don't follow why this is a bearish case for Apple. At the macro level, yes there are economic headwinds but compared to mature markets like North America and EU, there are still some ways to go for these two markets. Which is why Tim Cook is spending time there.

I'm fairly bullish on Apple, but both "smartphones are a saturated market" and "there's tons of market room in China and India" are overly simplistic.

China's median income is maybe $8,000/year or so.

India's median income is $1,600/year.

They're big countries, but they aren't that big. Each is about 4x the size of the United States, or about 2x the size of all of Europe. And obviously with those kind of incomes, the addressable market at anything vaguely close to US/European prices is a small fraction of the total population. And China at least is pretty protectionist.

At the same time, yes, everyone in the US/Europe already has a smartphone, noted. And yes, perhaps the upgrade market is getting a bit softer -- but still, it's not THAT soft. There are plenty of people in the US or Europe who will happily buy an iPhone every year or two for the next several iPhone generations, and a larger contingent who will buy every three or four years, but that's far from nothing. And Apple can at any time it feels like it wants to cut some margins and fight with Android for market share, in whatever judicious way it wants to.

Apple in 2015 was a unique company at the pinnacle of a unique moment in technology. It's may never be the company it was in 2015 again. But it turns out that there's a hell of a lot of value in a company that's not quite what Apple was in 2015.

> he doesn't "understand"[1] it

This! is exactly what made tech such an easy investment growth. Mainstream (2008) investors use three things to size a company: Industry and Market, Challenges, Production. Mainstream didn't get it. Underground did. And they were able to get in early on the action.

In virtually every traditional industry, production is simple and easy to measure, like coal mining for example. "See how quickly you can mine coal and compare that to how quickly you are mining coal."

But in Tech, every new product is a different raw material. The market is tested each time a new raw material is introduced. (Nobody knew the first iPhone was going to be a hit until the day the iPhone was sold, and THEN Apple's stock went up.)

For traditional investors, they don't understand what the question is when a new product is introduced (ex. Kevin O'Leary). The user however does understand. And that is what makes an investment a no-brainer.

However, these days, the traditional investors are not investing in Apple because they get the tech. Instead, they are betting on Apple specifically as a machine for tech production, regardless of product. I still don't think they get it.

But in Tech, every new product is a different raw material

More like you've gone up 1 level in the tech tree, and tech level n-1 items are the crafting components of level n. (I'm writing a game with a procedurally generated tech tree like this.)

But in Tech, every new product is a different raw material.

This is not just exclusive to tech. Board games, books, Toyota are all are their own 'raw material.'

Buffett actually confirmed[0] that he, personally, did not make this trade, and that it was either Ted or Todd (interesting that he didn't specify which).

[0]: http://blogs.wsj.com/moneybeat/2016/05/16/berkshire-bought-a...

> did not make this trade

Is trade the right word here? It seems like there must have been lots of trades in order to establish such a position...

That's the same for pretty much any large stock transaction. There will almost never be a buyer big enough to take the other side in the size that you want.

A 'trade' is also parlance for 'taking a position or bet' in finance.

That depends. If they were buying direct from say Apple (or anyone else with a large block to sell) then they would arrange a "Fill or Kill" order - which is a exchange order type specifically for this large deal (a bit anti-market really) - basically Buffets broker and Apples broker talk on the phone and arrange the deal at a certain price and time. Buffets broker sends in an order to the exchange asking for 1.3m (or whatever) shares in Apple at 600usd and the exchange will only fill orders that take the whole - that is it does not sit there getting a 100 shares at a time, but is waiting for someone else to fill the whole lot. The other sides broker then takes the whole order about 30 seconds later and they all go to the pub.

Source: listening to people who actually know what they are talking about. I may have mis-listened.

My understanding is that Fill or Kill doesn't require a single fill, merely that the entire volume is instantaneously filled.

So, if I send FoK Buy 100 shares @ 500$, then I could end up with 100 fills of size 1, or 1 fill of size 100. It makes no difference (except occasionally in commissions/costs depending on exchange). However if there were only 99 shares it would not partially fill, and would simply cancel unfilled.

Immediate or Cancel would allow you to get "up to 100 shares at a price of 500" and cancel instantly once available volume was consumed.

I hadn't heard of Ted and Todd! That's interesting. What would you recommend for further reading?

The annual shareholder letters.

http://www.berkshirehathaway.com/letters/letters.html

He could have bet on Apple purely on fundamentals that fit his thesis: well-known brand, moat/protected market, solid management, nothing complicated on the books, solid investor returns/dividends, 40% ROE, in a bit of a dip (both YTD and peak), low-ish PR PE P/FCFE, etc.

It can be evaluated as a value stock like many of his other investments rather than a crazy infinity/100+ PE stock that requires understanding if the tech is viable or not

My knowledge of Buffett is that he always wants to understand the companies he invests in, on a much deeper level than fundamentals. From memory, a few of his early winners were found by touring the company's facilities and noticing the company's physical assets (minus debt of course) were worth much more than the market cap.

If Apple continues to strategically invest in startups e.g. Didi then it could also be seen as a VC firm.

> Buffett has maintained his aversion to tech as he doesn't "understand" it

I'm not for sure Tim Cook does, either.

This isn't a huge bet in BH's world, barely cracking their top 20 holdings list, and it barely registers a blip for Apple, but it's culturally interesting to see Buffet make another no-tech exception for Apple, and it will be interesting to see how much that confidence transfers to the street.

Buffett and Berkshire do tend to love companies that generate cash, and Apple certainly does that. They don't tend to chase massive growth, but rather steady climbs backed by real profits. It seems like a pretty reasonable fit.

Does the Buffett "no tech" rule hold for Tedd and Todd, his investment managers?

It does not. And it's not a "no tech" rule, it's a guiding principle of not investing in what you don't understand. There's generally something smart to do somewhere in the market that you understand, so why waste time and energy on something you don't? Throw it on the "too hard" pile and move on.

Follow up to your edit - and I'm totally familiar with the "Circle of Competence" philosophy, but given Buffett has stated he won't invest in things which he doesn't understand, and he's said he doesn't understand tech, then it's safe to say that he has a "no tech" rule. I've always been unsure of how to interpret the circle of competence thing, as people always develop new skills, so personally I look at it as "only invest in things with which you are most familiar".

Maybe it's not about not understanding tech per se, but about not understanding the company.

If they feel like they understand how Apple works by now, that would make it qualify as not not-understanding, and thus it would not break the "rule".

Apple is a tech company but in the eyes of Berkshire maybe they are predictable enough regardless of what they produce (i.e. in terms of their cash flow, product strategy, etc).

Maybe it's about whether or not Apple is still a tech company?

> unsure of how to interpret the circle of competence thing

Can you figure out what apple would be doing 10 years from now. If no then its out of your circle of competence.

Do you know what Coca Cola would be doing 10 years from now, if yes then it is in your circle of competence.

Very good summary of circle of competence. Obviously a bit more complicated than that in practice, but this is probably 80% of it.

Yes. What I'm saying is that conceptually I understand Buffett's implementation of the circle of competence, it's just that his circle seems immutable, and I believe for many people they develop insights into new areas/categories of investing, while he seems to have focused on a specific area for his entire lifetime.

Many financial analysts categorize Apple as "Consumer Goods" rather than "Technology".

Example: http://finviz.com/map.ashx?t=sec

And there you've identified the nuance that makes Apple successful where other tech companies have failed. They may be technology driven, but they indeed produce consumer goods. Apple wants to be in every household. Look at their product lines vs. some of the other software/hardware integrated companies trying to push consumer products. Put on your average idiot hat (mine is stuck to my head) and it becomes plainly obvious that Apple makes products for you and markets them in ways that you can understand.

Apple's PE looks more like one of the old line blue chips that are Berkshire's bread and butter than it does like a high flying tech stock. Right now it has a PE of around 10, Alphabet née Google is around 30, Microsoft 40, and Amazon 288. Even Intel is around 13.

Apple was never priced like a growth stock, even when it was rapidly growing. Now that it's flatlined it's as if people expect it to shrink. Even if recent growth trends aren't good, they aren't terrible, and that company spits off so much free cash flow.

I'd be scared about if I were making BRK-sized bets as to what percentage APPL's cash flow is correlated with "cool" or "visionary".

Apple's great at reaping rewards for 5-10 years when they crack a new market. They're less great at winning over the longer-term in mature market categories. (That's probably the bigger problem with industrial design-based brands though -- they're far more susceptible to copycatting over a long enough period. All the perils of fashion without the agility to change things as quickly)

What mature market categories have they not done well in, and how do you explain their continued success in the PC market?

While they've been profitable in the PC space (laptops/desktops) to call them successful is a bit of stretch. They maintain =<10% of that market category which is hardly continuing success and more like continuing to survive.

Edit 1: Downvoters you realize the Mac (Laptop/Desktop) Division is 9.4% of Net Revenue? Source: http://files.shareholder.com/downloads/AAPL/2074014299x0x888...

That doesn't really matter, does it? Non-Apple laptop manufacturers are trapped in the low margins that commoditization results in. Apple's margins are rumoured to be a large multiple of that of other laptop makers.

Apple computers were 10.9% of FY 2015 revenue. That percentage has been steadily dropping pretty much ever since the iPhone came out and revenue has not been growing.

This repeated focus on PC business as a percentage of Apple's own business seems odd to me. Why have you selected it?

Three points:

- Non-trival amount of resources go into hardware R&D and OSX development

- Desktop and laptop computer market is increasingly shrinking

- Revenue growth is flat

It's not as simple as "well we make $x for every iOS developer, $x/2 for every OSX developer and that's going to be $x/3 in 5 years" but that's the general gist of it. Consumers are not buying computers and Apple has never been a major business player.

So those points do not answer the question, which makes your answer seem like a deflection.

Furthermore Apple's revenue growth may be flat, but their competitors are in actual decline.

Consumers are increasingly buying apple computers instead of any other, and this is increasingly true in enterprises as well as consumer spaces.

The percentage of Apple's business that is represented by PCs will obviously decrease as they add other business lines. What does that have to do with anything?

These points really don't matter.

1. A very large portion of their OS X development is directly applicable to what goes into iOS. And it's becoming more so. The same for their hardware R&D and what ends up being usable in their mobile products.

2. The consumer desktop and laptop market has been shrinking, because consumers have switched to mobile. Which is most of Apple's income.

3. Growth may be flat, but the margins are good, which exactly what BH is looking for.

Finally, and most obviously, Apple needs computers in order to make software for mobile. They own pretty much the whole stack and are able to make a hefty profit by selling their tools (hardware and software), that they would need anyways, to the rest of the world. This is classic vertical integration and it makes alot of sense business-wise.

What does this have to do with how successful Apple's computing business in the outside world?

I say

>While they've been profitable in the PC space (laptops/desktops) to call them successful is a bit of stretch.

You say

>Apple's margins are rumoured to be a large multiple of that of other laptop makers.

So we agree they're profitable but you are simply arguing they are so more profitable their volumes don't matter.

So do they? If we want to break out numbers [1] from March 2016 quarterly report. Mac (Laptops/PC's) accounts for $12.5bil Net Sales, which is 9.4% of quarterly sales totally <11 million units.

The funny thing about this is their Services category (iCloud, iTunes, App Store, Apple Health Kit) has (more then) doubled in 6 months and its now ~$3bil of Net Sales of their Mac category. At current growth rate's it'll eclipse it sometimes this year.

The Mac sector is quickly becoming the lowest selling division of the company. Currently only under performed by the Other category (Beats, AppleTV, AppleWatch, Cables, WatchStraps, Keyboards, Mice, etc., etc.). This is what I mean by surviving not thriving. The division is a very small corner of the company, and getting smaller.

[1] http://files.shareholder.com/downloads/AAPL/2074014299x0x888...

> The Mac sector is quickly becoming the lowest selling division of the company. Currently only under performed by the Other category (Beats, AppleTV, AppleWatch, Cables, WatchStraps, Keyboards, Mice, etc., etc.). This is what I mean by surviving not thriving.

I don't think that matters when you're looking at it from a value perspective, as BH does. The margins are the best out of anyone in that sector and it's making tons of cash. And, as you said, that's one of the lowest performing divisions of the company. They're basically the BMW of laptops and you're acting like that's a bad thing.

You only need enough volume to compete. If that lets you command a premium and skim off the bulk of the profits, who cares about marketshare?

It turns out you can enjoy network effects as well: at one point iPods accounted for over half of the global flash memory market. That was surely useful in bringing the iPhone and MacBook Air to market, no? I'd also say the PA Semi investment is paying off since Apple has owned the mobile SoC performance crown for a while now, with no competition in sight.

I agree the "sufficiently large" scale argument is probably valid, for both developer attraction and component pricing.

But high margins without a monopoly is a tough course to chart indefinitely. I think if Apple is still the incredible player it is in another 30 years, it'll probably be because they've integrated cloud accounts + hardware + security to the extent user abandonment of their platform is almost unheard of.

PS: Surprised no one pointed out my incorrect Apple ticker *AAPL

Apple has high margins and has been slowly but steadily (I think roughly during the last decade or so, maybe for longer) outgrowing the rest of the PC industry.

They are very successful despite not selling the most units and not seeing explosive growth.

I would love to have a business that is "continuing to survive" on 25 billions in yearly sales.

The top player in the PC space, Lenovo, maintains about a 20% share. So Apple is not doing so badly at 10%. They are a top-5 computer manufacturer by share.

In the most recent financial data I could find, Lenovo reported total company revenue of almost $13 billion, and Apple reported Mac-only revenue of just over $5 billion. So again: not the leader but doing a lot more than just surviving in the PC space.

Revenue is an iffy yardstick anyway. If you're the only player who is squeezing blood from that stone, it is not to the credit of the other players that they're squeezing harder. Apple still capture almost all profits in the sector, they take the meat and leave bones to the others. If there were more meat, they would be taking it, but there isn't.

I assume you realize that market share is not a measure of success - profit is.

Also, comparing the Mac business to Apple's other businesses is irrelevant - you may as well compare it with Pharmaceuticals - the relevant comparison is to other PC vendors, wherein you will find that they are highly profitable.

So what? They're still making the bulk of the profit in that sector, which is what investors would care about.

There's a Fortune article from 2013 arguing Apple made 45% of the profits in the global PC market. http://fortune.com/2013/04/16/pie-chart-of-the-day-apples-ov...

Since that has probably increased eg "Mac laptop revenues rose by 10.9 percent during the first six months of 2015, year over year, while Windows PCs fell by 9 percent, and Chromebooks contracted by 9.5 percent."

Not bad really.

I don't think they are succeeding in the PC market. As software professionals we have a warped view of the market. 90% of devs does not translate to any metric at market scale.

They are missing the VR wave completely, or in the very least very late to market. This almost categorically removes them from consideration in the gaming market.

Windows is making huge UX improvements year-over-year while OSX updates are incremental at best.

Some recent flops: - fitness tracking - high end pcs (MacPro still has fundamental hardware/driver issues years later. It was never worth its absurd cost. 5k iMac features a mid-range GPU from 2012) - voice assistants - business productivity software (iWork)

They are the only PC maker making money. In what sense do you see them failing?

The VR wave is just starting. The only VR devices that will matter in 10 years will be standalone mobile devices in the $500 price range. When I look at Oculus's technical achievements I don't see anything difficult for Apple to copy. On the contrary, I think Apple's mobile chip design expertise, vertical integration, and developer base put them in a great position to release a great mobile VR device. Apple is probably the strongest company out there in power efficiency, which is the central limiting factor for mobile VR.

Frankly, I think Apple should sit out this generation, and let Facebook/Microsoft et al spend the money to do free market research for them. They can just do R&D behind closed doors until they have something special. VR with a cable tied to a giant PC is cool, but it will never be a big market by Apple standards.

Where will Apple be when there are VR devices in everyone's Christmas stockings? That's the question.

> They are missing the VR wave completely, or in the very least very late to market

Not really. Very much remains to be seen what the big thing in AR/VR will actually be.

They are in the top 5 PC makers and the only one that is growing share. Did you not know this?

Also, how can you call them a failure at fitness trackers? They are by far the most profitable maker of fitness trackers.

When the 5k iMac was introduced, it was a market-priced $3000 5k display with a computer thrown in for free. I just bought one a couple months back when I realized they had dropped below $2k. I don't know anything about GPUs, but it's certainly not overpriced in the way that you might be able to argue the trashcan Mac Pro was.

As for missing VR; VR hasn't gotten off the ground yet. It's barely taxiing. Frankly, if Apple were to jump in anytime in the next year or two, it would probably fit their usual MO for when they join a market.

They're revolutionized 3 industries (consumer PC, portable music player, mobile PC) and whiffed on several others that went to similar competitors (business PC, servers, "cloud" SaaS). In every case there's two things in common: a consumer electronics market, and they had by far the best product when the market was first being established (Apple IIe, iPod, iPhone). In every case they made an absolute killing at first only to eventually level off and get passed by competitors once it becomes commoditized.

I attribute this to a very top-down design approach that only worked due to a visionary leader. Steve Jobs was able to predict what consumers would want before it was even remotely feasible, and would demand it from his engineers so that Apple could win the market while it was still in its infancy. A more bottom-up approach a la Microsoft or Google is more successful at the long game, because it's more efficient at spending its resources (i.e. focusing on the software and outsourcing the hardware on Android). In that time Jobs already had Apple cranking away on the Next Big Thing. Hit on one market every decade or two and you have a successful company. Hit on two in a row and you have the GDP of a small country.

In a post-Jobs Apple however, they're going to have to bet on either still having that same predictive power, or changing strategies to be more bottom-up. My bet is on the latter since a) Jobs was a generational business talent b) they now have an established premium brand and c) basically infinite money to spend on talent/resources.

All that combines to a very successful foundation for a company, but don't bet on them having the same playbook as the last 30 years.

This reminds me of a "memo" I wrote to myself in June 2013. AAPL was going down for a year for no "real" reason until it hit $385.10 (before the 2014 7:1 split).

I found it odd and since the numbers told another story (record high earnings, consistently decreasing debt, etc), I wondered what was the reason, so I made a prognostic about what I thought made sense and wrote it down to learn, tracking my thought process and prediction (verba volant, scripta manent)..

You can just look AAPL up to 5 years and see what I was looking at Sep 2012 peak to Jun 2013).

http://seekingalpha.com/instablog/12592771-jugurtha/2009662-...

You have to divide the figures given in my note by 7 to make up for the 2014 split.

I can't agree more, I made this chart a few months ago. https://www.tradingview.com/chart/AAPL/2P4KPhz8-Updated-AAPL...

If you follow the link at the bottom of the chart you should see the other chart I made back in 2013 but which got totally ruined because the website could'nt handle the split 7:1 correctly. A shame, what a great "told you so" punchline I could have by now:D

The word "hype" is very appropriate. If people in the "market prediction" business were paid based on the accuracy of the predictions coming out of their mouth, there would be no food going into their mouth.

They'd resort to other ways to scrounge for a living using their previous skillset, such as becoming Fortune Tellers; that is until someone starts tracking their predictions too.

If you're an "analyst" and your predictions are worse than tossing a coin, what on earth is the use of you?

The whole jumpiness of the people in that line of work is quite interesting. As if the goal is to drink large volumes of coffee, be stressed, run around with papers and be excited about what a bank thinks about a stock. Yes, but what do you think about that stock and are you aware that tickers represent real companies with real people in an economic context with real problems needing real solutions? That's similar to starting a startup just for the sake of wearing a hoodie and being a "startup guy" and talking about Heroku and Docker and code and exit strategies and forgetting to solve a problem.

This is well-stated. I worked for a Berkshire subsidiary for a good chunk of my career, and can tell you the Berkshire values really are what drive the investment. It's not so much about fundamentals, although they do need to be very sound or on the value side, as much as focused, lean management with a clear plan. In this case, I'm thinking Berkshire thinks Apple's share price represents a clear value at the moment (I agree, not that it matters what I think), and there's probably a lot of confidence in the management team going forward. Berkshire doesn't try to catch a falling knife, so they must think otherwise.

Depends if its like BH foray into uk supermarkets which dint end well.

Not every bet pays off. That's why there is risk in investment. It doesn't mean Berkshire didn't perceive value or sound management, it just means that they were wrong. They're good because they're right more often than the other guys doing the same thing, but they won't hit on every bet.

Yes but the issues with the UK supermarkets where well known at the time.

What's Apple's clear management plan?

Couldn't tell you. I don't follow them that closely. But I bet Berkshire does - they tend to do their homework before investing.

Make better products than everyone else, have better supply-chain management than everyone else, and have higher profit margins than everyone else even dreams of.

It's a plan that has been working out fairly well.

Right. A management plan is not the same thing as the product roadmap. Apple is secretive about their products, but not how they run their business.

>This isn't a huge bet in BH's world, barely cracking their top 20 holdings list

Top 20 holdings still sounds like a substantial bet...

Not for Berkshire. They hold onto shares for a long time and have less than 50 companies (the ones they really like just get acquired). The new AAPL stake is .83% of the portfolio.

If they only make 50 bets, isn't each one substantial by some definition? It's certainly not a scattershot approach.

It depends on the size of the bet, .83% of the portfolio isn't substantial in any way (if AAPL went to 0 tomorrow it would barely budge Berkshire's portfolio). In comparison their Wells Fargo stake is 23x the size of Apple's.

http://whalewisdom.com/filer/berkshire-hathaway-inc#/tabhold...

Also, BH probably does understand the car industry. And that's Apples next target...

It is totally that. :) They are betting on Apple destroying the existing car makers.

I think Apple is very well positioned to take a big bite out of the transportation pie, by all indicators they are strategic, committed, and have zero excess baggage. But I also consider it to be a very long play, I wouldn't expect returns from their TAAS (transportation as a service) venture in less than a decade. Is BH thinking that far ahead? I don't know.

After the TV right?

But it is a pretty large bet for Todd and/or Ted, who each manage ~$8-10b. In that light, this is a pretty significant statement about one (or both) of their judgements of Apple's value relative to quoted market price.

Good post. This is a bet by Todd or Ted and if you want to piggyback, should be viewed through the lens of how big a bet it is relative to their portfolios. The two of them have generated impressive returns thus far, and are high on my list of investors worth following.

Took. This happened in March at an average price of $109. Today it is around $93. Berkshire just disclosed it today.

That's a really good point. Various articles are spinning it as if they bought AAPL because it's so cheap after the nosedive it's been in lately. That's not what the timeline was, and isn't really Berkshire's MO to time the market like that.

Well we don't know that he didn't buy more at the cheap price as well though. He could disclose today and have bought some on Friday at the lower price.

But like you said, we don't know that. At this point, that is just speculation about a fact we have no reason to believe happened at all.

You don't know what price they bought it at, it could have been purchased at any time between Jan and March (where it traded in the mid $90s frequently).

True, good point. AS of March at an AVERAGE price of $109

And in a quarter, they may disclose another contrarian buy to dollar cost average that down to $100.

It's amusing that BH paid the highest price you could pay for this stock in the last few months. :)

It's probably hard to buy a billion dollars of any stock without driving the price up, even if you spread purchases out.

For most stocks, but not Apple because it's both very high market cap and very highly traded. It has been averaging 43M shares traded a day which is over 4x the size of Buffet's trade. There are also plenty of days with it trading at much more than this size (it did 113M on April 27).

How many days do you think one would need to spread out a purchase of 1/4 of a stocks average daily volume in order not to noticeably move the price?

Presumably Buffet would respond to you by noting that the stock market is a voting machine in the short run and a weighing machine in the long run. i.e. for the companies he owns, he isn't generally concerned with short term stock price fluctuations.

Are billion dollar investments in public companies not public knowledge? (Serious question)

Institutional investment managers are required to disclose their investments. In this case it's called a 13F.

Corporate insiders (officers, directors, and employees) need to disclose trades involving their own company.

I don't believe an individual trading his or her own money need to disclose anything to the SEC. I could be wrong though.

Rank and file employees generally do not have to disclose their trades. I've worked at 3 public companies and never had to disclose to the government. At Merrill Lynch (and at other private investment houses), we did have to have ALL of our trades cc'd to the compliance desk, but that's a Wall St thing, not a government thing.

I'm pretty sure the rule is around owning a certain fraction of a stock (to make sure it's publicly known if you're trying to buy a controlling stake, because this would affect the price), not the dollar-value of it. And Berkshire owns ~0.18% of AAPL.

They are once the quarterly 13F reports come out.

https://www.sec.gov/answers/form13f.htm

For smaller companies it can also come out in a 13D which is faster (within 10 days), but only if the investment is more than 5% of the company. That's why there are a lot of ownership stakes of 4.9%.

>only if the investment is more than 5% of the company

Interesting, I think it's the same percentage in Indian stock exchanges.

> That's why there are a lot of ownership stakes of 4.9%.

Is reporting speed really important enough to change the size of your investment?

Apparently so. Hedge funds really don't like to disclose their positions.

Seems public to me. What am I missing?

What an odd time to invest in Apple. Its in something of a slump with how it missed the mark on wearables and in something of a milquetoast design/innovation phase in general. When the watch came out Apple was selling for nearly $140. Now its $93. The market is not showing strong confidence in Apple, at least in the short term, and there's nothing on the Apple roadmap that says big growth in the future.

I wonder if this is a sign of the internal politics at BH as 85 year old Buffet gets closer to retirement/death. The younger guys want to make their mark and betting on a typically galloping horse like Apple is a nice way to start the pissing contents with others wanting to run BH after Buffet goes. If Apple does a massive rebound then the guy who made this call will be seen as the young whippersnapper who 'knows tech' and can take BH into the 21st century.

Buying low is not a bad place to start for an investing strategy.

I just looked at Apple's 3 year. It seems to dip and rise significantly. Maybe BH thinks that this is the bottom of a dip. I guess we'll see, but I can't remember the last time I was excited by an Apple product. They seem to be graying faster than expected as the mobile revolution evens out.

I'm just here to set in stone and state for the record that I believe this will be a losing play. My reasons are here:

Rationale here from a comment over 3 months ago:

https://news.ycombinator.com/item?id=11035168

> last time I was on an airplane (December), every single older woman over the age of 60 had an iPhone. This means that it's not only reached critical mass (the late majority on the technology adoption curve has been achieved), but now it's no longer hip.

> I'm not sure what will be next, but I'm guessing it won't be Apple's.

> Were I gambling man, I'd have shorted Apple's stock right there after that airplane ride.

So when I'm wrong, y'all can roast me proper.

Those seem like valid suppositions, but I do think you're missing a big variable.

(I think) you only take into account the US Market but the emerging world is late to the party and should represent a big piece of the pie. It hasn't reached majority tech adoption nor is it no longer hip.

That said, I also think its a loosing move because of the downwards trend in AAPL stock- bit that's only layman's conjecture. I guess it depends for how long they want to hold it.

Buffett and his managers aren't concerned about the stock price "trend," they're looking at the stock price in relation to the intrinsic value of the equity. With that said, I'd bet Todd Combs made the investment and he does trade more frequently than Buffett and Ted Weschler.

Be careful thinking Apple will keep sellng iphones and ipads. Their expertise and their cash can probably be thrown into a lot of industries with disruptive success (car industry, pharma, space exploration, etc.). Even the name, Apple, does not bind the company to any specific line of product. I think what the investors are betting here is the ability of Apple of coming up with something as big as the ipod-ipad saga in the coming years. I can see risk in this assumption, but I don't believe is 100% going to turn out badly, so far I'd distribute probabilities equally and do a 50/50 that Apple gives the investors 10x in the next 10 years.

You truely beleive that a company with almost the largest market capitization of any company has a large chance of increasing it by 10x?

This - and the fact that branching out of phones/tablets/computes into cars or space exploration would be a pretty big jump industry wise. Everything they've built to-date has been an extension of either desktop and portable computing or Internet/networking/web technology. The one exception to this is their Music/Book/Movie business, but from my understanding those not only pale in comparison to their "physical" device sales, they are only done out of necessity to supply said devices.

in 1993 Exxon was the world's most valuable company with a market cap of roughly $80B. they didn't reappear as the most valuable company again until 2007 with a valuation of roughly $500B. yeah, big swings are still possible even in very established markets.

How do these numbers look closer if you correct for inflation.

$80B in 1993 are equivalent to $114.79B in 2007.

The way I see it, Apple either grows exponentially or linearly and I give those outcomes a 50/50.

By the way, a company doesn't need to do 10x the stock price to deliver 10x to investors. They can pay dividends. They can sell divisions.

We have been enjoying exponential growth for a while now:

https://ourworldindata.org/wp-content/uploads/2013/11/long-t...

Um, explain to me how their expertise could be thrown into pharma?

It can't. Their expertise is in consumer goods and marketing in particular. They don't have the data expertise, medical expertise, or really any relevant experience for pharma.

Maybe not drugs but I wouldn't bet against them on medical devices.

Apple is already priced as a low-growth stock (P/E around 10). So if they never do anything more than leverage the brand loyalty of iPhone customers, they'll still fulfill the expectations of their price.

An adoption curve leveling off is a normal thing in business; money can still be made. When did the adoption curves for insurance, paint, homes, jewelry, soft drinks, etc. level off? Long before Berkshire Hathaway came along, but they have done pretty well in all of those of markets.

I think BH has a good chance of getting a return.

I didn't realize the P/E was so low. Sounds like a bargain.

Edit: They're paying a modest dividend as well. AAPL is becoming more of a mature stock, but that's not a bad thing.

Apple's P/E has always been low compared to its peers. Even when the iPhone and iPad growth were both very high, I think it has always had a < 20 P/E.

If you discount cash, it's actually around 6

Why can't they slog along with compressed margins for the next 20 years? There are hundreds of viable companies in the S&P 500 that have fully realized their user base, but are perfectly good investments. I feel like SV types get too hung up on growth, and fail to see that producing consistently high profit is still a great way to make money.

Why does an older person using something mean that a younger person wouldn't want to?

There's no Android device on earth that's nearly as hip as the iPhone. Regardless of how many old people are on iOS.

This happened with Cadillac and they've been spending a lot of money to appeal to a younger demo.

No, it didn't. Cadillac didn't suddenly become unappealing to young people just because old people like them.

They became unappealing because they were simply unappealing to young people and there were more appealing options for young people.

Android has yet to produce anything that even remotely resembles a more appealing option to these demographics. Apple is an expert in "hip." If you have an Android and your friend has an iPhone, you know that your messages are showing up green whereas everyone else's are showing up blue. This lack of totally 100% superficial conformity alone means that Android has a monstrous hill to climb with younger people, e.g. the people who care most deeply about acceptance amongst peers.

Yes - branding drives perception which can drive consumer decisions. Consumers can also drive a brand.

Certainly skewing old wasn't the only factor for Cadillac but it definitely was a component and they are trying to spend their way out of that image (both with ads and with more performance-minded cars).

I agree that Apple is an expert at hip but their time dominating is limited. It gets harder to be hip when so many people, especially those much older have them and mom/dad/grandma/grandpa all want to Facetime you. Younger people have been migrating their time away from Facebook because of the saturation.

I disagree on Android and the data doesn't back up your statements. Android is comparable with younger demos [3] and has more market share [1] (esp. outside the US) [2] so they don't "have a monstrous hill" to climb with younger people. Android and device manufacturers are positioned quite well.

It's going to be a challenge for Apple to continue to ask for a premium price when they no longer have a compelling quality argument and Android OS and devices keep getting better with many outperforming the iPhone. People are also getting tired of Apple's closed systems. They are "The Man" but most consumers haven't realized it yet. The squeezing they do with storage is ridiculous.

[1] 52.8% market share in the US, Jan 2016 - https://www.comscore.com/Insights/Rankings/comScore-Reports-...

[2] 80.7% market share globally, 4Q2015 - http://www.gartner.com/newsroom/id/3215217

[3] 52% of millenials have an Android device vs 44% for iPhone, 2014 - http://www.techtimes.com/articles/15084/20140908/draft-andro...

> Younger people have been migrating their time away from Facebook because of the saturation.

Therefore Apple is becoming uncool? Kids are moving away from Facebook not because old people are using it and that makes it uncool. It's because old people are using it and that means old people are watching them with it. Facebook is also just getting worse and worse as a product, while things like Snapchat are getting better and don't have parents/employers looking over your shoulder.

Re: Android, these are the same arguments we've seen since Android first started getting market share, yet Apple is still chugging along just fine. Market share is only one part of the story, and it's so far from an accurate indicator of "in" factor (exclusive things are often "in") OR of product health/profitability.

"People" are getting tired of closed systems? Which people? FOSS advocates? Hackers and tinkerers? Thank god there are 100x more people with equivalent checkbooks and less idealism when it comes to which devices they purchase.

That's really an issue with most luxury car brands, they become associated with old people because that group can more readily afford them. A $600 phone is attainable by most age groups, so I really don't see the same thing happening.

It's more Cadillac became seen as an old person's car. That hasn't happened to the iPhone.

It hasn't happened yet, perhaps, but the demographic information I've seen (which, admittedly, is from 2013 and may have changed) shows the iPhone-to-Android ratio monotonically increasing with age, which certainly suggests a risk for that:

http://www.marketingprofs.com/charts/2013/10957/how-iphone-a...

Keep in mind, too, that parents may not want to spend very much on a cell phone for a kid who's likely to drop it, lose it, etc. It may just be that the higher price makes it less likely a younger person will have one.

That data and others I've seen doesn't include < 18. In my experience I've only seen kids with iPhones, often the previous generation from their parents.

iOS seems to have better kids content and iPads and iPhones are quite durable from drop with protection.

I think it was far more complicated than that.

Cadillac was a luxury brand that completely lost the plot, in terms of quality, service and importantly: brand.

As a result, luxury customers went elsewhere almost entirely (hello German sedans) and it stopped being an aspirational brand.

With younger buyers mostly not interested, most of success was selling to older customers for whom the brand still had left over positive associations, plus some die hard "no foreign cars" types. But this just made the brand problem worse, cementing the "old person car" brand.

So yes, they're fighting it now (without much success). But the real problem was that they started to peddle bad cars, and competitors ate their lunch. This in no way resembles the current situation with iPhone.

I dont undertand, why reaching the critical mass would make the business fail ? It's not all about growth

It wouldn't make them fail but as an investment the growth could be priced in which is bad if they miss targets.

Apple is a 10 P/E, FYI. And their earnings are GAAP, unlike their "growing" peers.

This is the top comment in this thread at the time of this writing, and it's armchair opinionitis at its best. Put your money where your mouth is if you truly believe what you are saying. Until then your "setting in stone and stating for the record" is completely meaningless.

For one thing you haven't considered that this might be priced into their P/E ratio, unlike most other growth tech companies. If you were a "gambling man" this would be part of the equation in deciding if they are over- or undervalued.

Do you not get out much? Old people been using iPhones since forever.

The efficient market hypothesis would like a word with you.

This has zero to do with the value proposition of the stock. AAPLs P/E is below 10 at this point. They have about 1/3rd their value in cash alone, which means their actual P/E is even lower. It doesn't matter if grandmas are using Apple products, they are a seriously good-value stock.

This all assumes that Apple, who has a solid history of product category pivots, has no plans, ambitions, or interest in entering new markets. Remember how saturated iPods became? Remember when it seemed they were running out of colors and ideas for new music players? The answer was iPhone.

What phone is "hip"? Phones might have reached the point where there isn't going to be another big paradigm shift anytime soon that changes the ways phones are used like the iPhone changed things.

So Apple (and Samsung, etc.) may have exhausted a lot of the growth opportunities in the mobile market, but there are still other markets for them. Apple didn't even have a phone product 10 years ago, so it's hard to say what their future endeavors will be.

Betting on Apple doesn't mean betting solely on the iPhone.

At my church I play in a music group with mostly high school students. Virtually all of them have iPhones. So it's not a good indicator.

Your experience may not be representative of the general market.

http://www.marketingprofs.com/charts/2013/10957/how-iphone-a...

I think it hasn't yet reached critical mass yet in plenty of second world countries. In Romania for instance there are plenty of lower end phones (specially /w teenagers) not because it's not hip (on the contrary, it yields social status) but because compared to the average wage here it's expensive as hell. The iPhone SE will probably sell heavily around here.

EDIT

An US (correct me if I'm wrong) airport might not actually give an accurate picture of the market since the lower class doesn't fly planes that often.

Let's say you're an owner of one of the nations biggest car insurance companies... and the biggest threat to auto insurance are automated cars. Perhaps the smart thing to do, if you're an investor is to hedge your bests by investing in a company that is likely to dominate the sector.

Of course Alphabet would be a more logical path, so this theory might be bollocks.

How are automated cars a threat to car insurance?

Reduction in accidents and auto makers taking responsibility for accidents.

http://fortune.com/2015/10/07/volvo-liability-self-driving-c...

Why should one need to buy a liability insurance policy on a self-driving car?

What driver exactly am I insuring?

> Why should one need to buy a liability insurance policy on a self-driving car?

The same reason property owners in general by liability insurance for liabilities that may occur to do property they own.

> What driver exactly am I insuring?

Most likely, you're insuring against liability resulting from your obligation as the owner (or leaseholder-in-possession, in the case of a lease) of the autonomous vehicle to maintain the vehicle in condition for safe operation and to remove it from operation if that is not possible.

The liability in car insurance is virtually unlimited. Cars are very good at killing people and damaging property. You don't have to insure against small payouts (large excess gives you small premiums), and this is an area where the insurance companies want to upsell you.

The risk you're insuring is negligent or wilful bad driving, and risks inherent in the technology.

All of the above is true for self-driving cars, only with much-reduced negligent risk. The premiums will go down significantly, but the consumer motivation and the public policy interest to have insurance will remain. It may be assumed by the manufacturers for 100% self-driven cars, but insurance of outsized payouts is not something unique to the current iteration of the car industry.

Less accidents leads to lower premiums.

wouldnt fewer payouts mean more profits?

It would mean much lower premiums or even no premiums as car manufacturers may take the liability.

Caveat: I know very little about economics and find this stuff confusing.

Here's how I assume it would work. For an insurance company to be profitable, premium payments need to be larger than claims payouts.

If we assume self-driving cars will be a lot safer, then claims payouts will drop significantly. If we assume insurance companies compete with each other, then that opens up their margins and eventually that will contract again as they all lower premiums to compete.

The end result is a smaller total amount of cash flowing through those businesses. The whole industry will contract because there's just less need for it to exist. You can think of insurance companies like a farm that harvests risk. With less risky automobiles, there's simply less crop for them to reap.

> Of course Alphabet would be a more logical path

Why? The only thing we know for sure is that Google has been much less secretive about its desires. That doesn't mean that it is further ahead or has a better solution (and for the record, I'm not arguing if they do or don't).

To get around the paywall, follow this link

http://bit.ly/1VYxVrA

This bit.ly link redirects you to the first google hit after looking for this article on Google. For some reason this circumvents the paywall.

Just click the "web" link underneath the title on the comments page.

Never knew that. Today I learned. Thanks a lot.

Better still:

http://archive.is/9Y8jf

And here I was thinking "what a great time to buy Apple stock".

I don't think Buffet is betting on technology. From his perspective he is betting on the car and car brand of the future.

Only he knows for sure but it seems a lot more likely from reading his annual letters that he's betting on the quality of their management team and their continued ability to produce profits. It would be very out of character for him to make a bet on future technology.

The stock is trading at a discount to earnings and probably not even that huge of a premium over book value (relative to its peers). Incidentally, it's probably (still) the most valuable and venerated modern consumer brand on earth.

Not a terrible bet. Their dividend yield is fairly respectable at current prices, the price has fallen to around 2012 levels, and Berkshire mostly likes long-term, stable bets.

I personally don't see Apple doing too much in the short term, but they'll certainly continue to be around, and will probably match the market in returns for the foreseeable future.

Very interested in how the trade was executed. A big fish order, was it done in small chunks, by proxies? It was certainly not done in one go.

Experience: Even 10 years back putting when in an investment management team, a $100 million order (of roughly same magnitude for total outstanding) was done painstakingly, often over several days, via various brokers, varying what was done based on intra-hour liquidity. Now, intra-hour liquidity is much less than hours and highly automated, so anyone HFT looking, would be interested.

$1bn~ MV on a very heavily traded stock over a quarter does not seem like it would require any sort of acrobatics on BRK's side. Know nothing about their execution but really doesn't seem to be anything difficult.

Traditionally Buffett works with two or three stock brokerage firms he trusts and tells them to buy the stocks he wants. They often just keep buying when blocks come on the market or it looks cheap. That can go on for months or years. Maybe not so much with $1bn of Apple but his $27bn stake in Wells Fargo for example has been built over some years.

it seems like a lot until you realize it's 1/300 of Berkshire Hathaway and 1/550 of Apple

It still seems like a lot (to me).

"A billion here and a billion there and pretty soon you're talking real money." often attributed to Everett Dirksen but he denies saying it.

Seems like real money to me.

Edit: fixed typo

And that it probably wasn't Warren Buffett who bought it (he has 2 portfolio/investment managers who he's gradually handing the reins to).

Then it still seems like a lot, frankly.

A little more than 1% of its cash and a little less than 1% of its total equity portfolio.

Agreed - if you buy an S&P 500 index, 1/36 of your money is in Apple. (Holdings tab on https://www.spdrs.com/product/fund.seam?ticker=SPY)

Not that big a bet on BH's part.

Not necessarily. The index fund is supposed to track the index. It doesn't need to actually buy the exact stocks as the index, though in the case of the S&P 500, that might be the easiest strategy.

Uh, it's not only the easiest strategy but the only purpose the ETF exists. If people thought SPY had drifted from its benchmark, no one would use it.

ETF still have different replication strategies. To the customer they guarantee to track the index, however they might buy completely unrelated stocks or options to achieve this. The replication strategy should be an important factor when buying an ETF.

I agree with what you're saying but I was talking about the SPY example listed above. The prospectus [0] for SPY says that it's not actively managed and that it rebalances at least monthly.

[0] https://www.spdrs.com/library-content/public/SPDR_500%20TRUS...

Yes, and SPY is the monster ETF that it is because there is no funny business and it tracks the index the old fashioned way by actually holding the securities. Broker dealers can trade in a basket of securities for new shares of SPY and vice versa which keeps it very close to perfectly tracking the index.

SPY isn't the only S&P 500 index fund.

1/300 of the most valuable company in the world (or close) is still a hell of a lot.

"I can tell you this was not a purchase Warren Buffett made. It was one of his two lieutenants"

@BeckyQuick on CNBC this morning

What I get from BH signal: Well I don't have to worry and put AAPL into retirement portfolio, although probably means no longer salacious enough for shorts or immediate growth investors.

... until the car comes out.

In reality, Apple has always been a long for me, and presumably anyone working in tech that invests directly.

Seems that there is a significant difference of opinion between Carl Icahn and Warren Buffet.

http://www.bloomberg.com/news/articles/2016-04-28/billionair...

To be honest I always thought that Icahn was never in for the long term. He just went and raised a ruckus about wanting those $100B cash reserves distributed to stock owners.

I saw a TV segment / interview about Icahn years ago and that was impression I got. His M.O. is to buy a stock, create some attention, and sell, based mostly on the attention he brings, more so than the improvements he makes.

In the article, Ichan noted, "if China was basically steady I would probably go back into [Apple]...I hope one day to get back into [Apple]."

That's not a huge indictment of apple, but rather a concern.

He did note that Apple still looked cheap: http://www.cnbc.com/2016/04/28/icahn-we-no-longer-have-a-pos....

It's hard to read too much into it. For all we know, Ichan wants to play things a little conservative for the rest of 2016 due to big losses in his oil investments.

A bit off topic, but when you buy that many shares of a public company can you negotiate a discount? Is the trade done directly with Apple, or does Berkshire Hathaway just buy it through Nasdaq ?

Let's say you are a private company and want to raise money. Instead of taking on debt you decide to sell some of your business. You will go through an investment bank who will help you quantify the value of your business and underwrite/distribute shares of it to the public. This is the primary market where new shares are created.

After that happens market participants can sell those shares to each other based on supply and demand. As demand for a companies shares rise, prices rise and vice versa. The secondary market is what you and I as individuals think of when we talk about buying and selling stocks. There is no real discount that Apple could offer Berkshire because they aren't selling the shares, market participants are (individual investors, brokers etc). The trade would take place as a complex series of transactions on a variety of exchanges. Sometimes Nasdaq, but other times on exchanges like ArcaEdge, Bats, Direct Edge, NYSE and others.

The complexity is that if you dump 1 Billion dollars into the market to buy x number of shares of AAPL you will drastically increase demand and move the price considerably, so the trade must be executed as a series of transactions over a given time period.

Now if one public company buys another public company in a merger there is a set share price that is negotiated but that's outside of the normal process of buying and selling stocks.

If AAPL were interested in selling more shares (their cash reserves growth indicates they don't), they would usually sell the whole bunch of them at once, either to one investment bank, or a consortium (who then resell it on the open market). So yes, Berkshire is buying a lot, so instead of selling to Goldman Sachs, Apple may sell to them.

It all comes down to whether both Apple and Berkshire can agree on a price and cash flow that is better than buying/selling on the open market. This would probably not be a great discount for the buyer. Other companies would probably still ask Goldman to broker the sale (at a lower fee) and take care of regulatory compliance, but both AAPL and BRK like to maintain in-depth knowledge of the intricacies of the stock market in-house, so they may just do everything themselves.

I swear this is just for headline generation.

I mean, a billion IS a lot of money, but it's a very small risk on BH's part, and an even smaller part on Apple's.

That amount of money is a lot of money relative to other money, but it's not really a big deal relative to either party here.

However, I think that Buffett is just making a statement of 'look how much I think of Apple' by throwing that bn around, perhaps inspiring other investors?

Not really my preferred science...

Buffett himself quite possibly had no knowledge of this investment

Not sure about the downvotes. To quote directly from the article:

"Mr. Buffett has said that large stock picks of above $1 billion are usually made by him, while smaller purchases are made by one of the two managers. They don’t consult with him before making their investing decisions, Mr. Buffett added Monday."

[misinformation] One or both of the parties saw fit to press release it. It's clearly a favor for Apple. [/misinformation]

edit: For some reason I didn't process that the investment was old, although it's the first few paragraphs of the article.

From the article:

> Berkshire’s positions were disclosed in a 13F filing with the Securities and Exchange Commission, a quarterly requirement for investors managing more than $100 million. The report indicates the number of shares held and the value of each stake at the end of the quarter, so it isn’t clear if Mr. Buffett’s firm has continued buying the stock since the quarter ended.

Almost everything on the web about Apple is just 'headline generation', but given the general negativity, Buffet showing confidence is a meaningful signal.

The amount may be small, but Buffet didn't get where he is with random bets.

I thought Buffett doesn't invest in tech companies - is Apple now so much away from tech and so close to being a product like Coca Cola?

Normally he doesn't but he has made exceptions in the past. He has a position on IBM, for example. I wouldn't consider IBM "away from tech".

That used to be true, but he's had a stake in IBM since 2011 (which he just increased)

car companies OTOH ?

Apple is now almost a value stock. With an incredible franchise. Don't bet against Buffet

Curious, anyone have any info on the relationship between Jobs and/or Cook and Buffet?

To be clear, it's not even a technology investment. It's more of a clear, easy to understand investment in a hardware product company with great margins, great marketing, great customer loyalty. It's like investing in Coke.

This doesn't make much sense to me. I would expect Apple to have nowhere to go but down since a few years ago. I realize this isn't a huge bet, but what are they betting on? Apple for Cars?

For everyone dismissing this as a small play for BH it's not that small also we have no clue about other possible elements of this position (e.g. derivatives, options etc.).

That logic works the other way also (ie: it could just be some huge long in the stock to arb an options position and therefore be a $0 exposure to Apple stock). Disclaimer: I am not an options market maker so I'm unsure if you can realistically do a delta hedge on 1bn of AAPL.

very true

13F requires you to report all long listed option positions.

As someone who is short AAPL, my perspective is that they simply don't have room for growth. At the moment, they are essentially a one product company: the iPhone. And yes, that product is insanely profitable, but those numbers are going down, and personally I don't see a way for that trend to change.

Apple has expanded into every available market on the planet (literally). The only way for them to grow at this point is to increase their market share relative to android, or increase world economic growth sufficiently that more people in developing countries can buy iPhones.

Increasing their market share relative to android in any significant way seems incredibly unlikely to me at this point. As technology stagnates (as is happening with smart phones), the premium products lose cachet and the lower-end products start to achieve parity with their premium competition.

The two markets where they could still theoretically hope to achieve more growth/penetration are China and India. But China has been antagonistic to them of late, and has demonstrated an interest in protecting its own incumbents who are now making phones that even Westerners will buy (e.g. Huawei). India on the other hand is a highly tech-oriented culture, and as such has a predilection for customization and control that tends to make them prefer android phones. Not to mention that the CEOs of both Microsoft and Google (the only two competitor platforms to the iPhone) are currently Indian, and both companies have demonstrated a specific interest (especially Google) of expanding in the Indian market. And I think that gives them an advantage that's hard to overstate.

All of this would be fine if the market itself were expanding. But it's not. People are upgrading less and less frequently. This looks to me just like the PC market of 5-10 years ago or so. Things have gotten "good enough" for most people. I certainly no longer feel compelled to have the latest and greatest phone right away, and it seems to me that most people feel the same.

Lastly, there is the possibility that they will create some new category defining product. This is of course a real possibility, but I feel pretty confident that anything they attempt to do in the car market will fall flat on its face. I could certainly be wrong here, but I just don't see how they could possibly offer something so much better than existing cars that i'd want to pay an Apple-level premium for it. Especially when they're competing against someone like Tesla, who has already captured all of the rebellious smart-person cool points in this category.

Of course, I could certainly be spectacularly wrong. And to be honest, if I am, I don't think i'd mind losing the money too much. Because it'd mean that we'd all probably have some cool new product to play with.

>Increasing their market share relative to android in any significant way seems incredibly unlikely to me at this point. As technology stagnates (as is happening with smart phones), the premium products lose cachet and the lower-end products start to achieve parity with their premium competition.<

Counter-example in a mature industry: Porsche. When the GTR was launched 9 years ago, people were hyping it to be the death knell of all other performance cars. Instead, today we have a wider selection of very good cars and the GTR is no longer the no-brainer choice for performance enthusiasts. Yes, it still offers good performance-value, but there are other good choices out there as well. Of all the car makers, Porsche was thought to be the most severely impacted by the GTR and yet they have gone on to greater heights.

>The two markets where they could still theoretically hope to achieve more growth/penetration are China and India. But China has been antagonistic to them of late, and has demonstrated an interest in protecting its own incumbents who are now making phones that even Westerners will buy (e.g. Huawei)<

How much money is Huawei making from selling Android phones? What about that Google ad revenue in China, how's that doing?

>Not to mention that the CEOs of both Microsoft and Google (the only two competitor platforms to the iPhone) are currently Indian, and both companies have demonstrated a specific interest (especially Google) of expanding in the Indian market. And I think that gives them an advantage that's hard to overstate.<

Microsoft's chances at mobile at this stage are as good as Ted Cruz's winning the Republican nomination. Some number closer to zero. Again, how much is Google making from Android phone sales? How are the Nexus sales numbers?

Google's competitor is not Apple. Google's competitor is Facebook. Luckily for Google, Facebook is banned in China too.

>I certainly no longer feel compelled to have the latest and greatest phone right away, and it seems to me that most people feel the same.<

The smartphone is a very interesting product. It is used multiple times a day, is cheap enough to be ubiquitous yet still offers value to people who seek to differentiate. In my view this is only the beginning of the smartphone race. Technologies like NFC/Apple Pay are still in their infancy and are not widespread enough. There will be more sensors, better imaging technology, more features that people would desire.

How the differentiation is implemented, matters. You will not find someone cross-shopping Hermès with Coach. Similarly the large majority of people will not cross-shop a Ferrari with a Nissan. That is not to say anything about the value of the brand. It just means there are different markets being served.

> Counter-example in a mature industry: Porsche. When the GTR was launched 9 years ago, people were hyping it to be the death knell of all other performance cars. Instead, today we have a wider selection of very good cars and the GTR is no longer the no-brainer choice for performance enthusiasts. Yes, it still offers good performance-value, but there are other good choices out there as well. Of all the car makers, Porsche was thought to be the most severely impacted by the GTR and yet they have gone on to greater heights.

Ya I wouldn't make the mistake of saying that it's the death-knell of the smart phone. I just think we'll be seeing a significant contraction of the market that has driven the insane profits apple has had for the past few years. Certainly smartphones will be a massive and massively profitable product for years to come.

> How much money is Huawei making from selling Android phones? What about that Google ad revenue in China, how's that doing?

Much less, even more so in unit terms. I wouldn't invest in Google or Huawei at the moment either. I'm not short Apple because I think those companies are going to do well, I think they're all likely to do poorly. Google and Huawei will expand their market a bit, I think, but their unit economics suck relative to Apple so it won't matter as much.

> Microsoft's chances at mobile at this stage are as good as Ted Cruz's winning the Republican nomination. Some number closer to zero. Again, how much is Google making from Android phone sales? How are the Nexus sales numbers? Google's competitor is not Apple. Google's competitor is Facebook. Luckily for Google, Facebook is banned in China too.

Totally agree. Again, I don't expect Google to do well at the expense of Apple. For Google phones are just a way of pushing their services, so gaining market share vs Apple doesn't help them all that much in terms of their bottom line.

> The smartphone is a very interesting product. It is used multiple times a day, is cheap enough to be ubiquitous yet still offers value to people who seek to differentiate. In my view this is only the beginning of the smartphone race. Technologies like NFC/Apple Pay are still in their infancy and are not widespread enough. There will be more sensors, better imaging technology, more features that people would desire. How the differentiation is implemented, matters. You will not find someone cross-shopping Hermès with Coach. Similarly the large majority of people will not cross-shop a Ferrari with a Nissan. That is not to say anything about the value of the brand. It just means there are different markets being served.

Ya, I don't disagree here either. I don't expect Apple to lose significant market share in places where they're already established. I mostly expect that the upgrade rate will slow, and they will not gain new market share in India and China. The sum of those two things is a substantial decline in profits for them over the next couple of years.

I could certainly be wrong about all this. It's actually the first time i've ever shorted something, and it's kind of just an experiment to get my feet wet with more exotic trades. I don't claim to be any sort of expert on the subject :).

>>Ya I wouldn't make the mistake of saying that it's the death-knell of the smart phone. I just think we'll be seeing a significant contraction of the market that has driven the insane profits apple has had for the past few years. Certainly smartphones will be a massive and massively profitable product for years to come.<<

I'm unsure my point came across clearly; if it didn't then the fault lies with me.

The GTR and the 911 (in all its variants) are in the performance segment. No one is saying just because the GTR exists, all other segments like SUVs, MPVs, saloons/sedans etc will no longer exist. To reiterate: despite Porsches costing more and GTRs costing less, and on an objective level the GTR is a better car in terms of performance, 911 sales are not flagging off. They have instead increased. And the 911 is already more than 50 years old. [1] So your conjecture that premium luxury smartphone sales like the iPhone will level off or even be reduced due to "commoditization" is not very well-supported. In fact the inverse is true: Porsche is one of the most profitable car makers on a per-unit basis. [2]

>>I don't expect Apple to lose significant market share in places where they're already established. I mostly expect that the upgrade rate will slow, and they will not gain new market share in India and China. The sum of those two things is a substantial decline in profits for them over the next couple of years.<<

I think this is where we fundamentally disagree. In my experience I have never once met a person who said they aspire to own a Hyundai, Kia, Lada etc or have a poster of these cars on their bedroom wall. Nothing wrong with these brands of course, they bring in profits for the manufacturers. But these are different markets we are talking about.

It is true that Porsche had to come up with the Cayenne to stave off bankruptcy, because at that time SUVs were in demand and they did not have one in their lineup. Yet this is instructive as it only reinforces my point because the Cayenne is now the #1 selling Porsche. Chevy, Ford and all the other makers combined can continue to sell more SUVs than Porsche does Cayennes but they are in different markets. People who buy Cayennes don't even consider these other brands. They might consider Land Rover or Mercedes/BMW or even sister-label Audi (essentially the same chassis). Same applies to the iPhone vis-a-vis Android "replacements". Who knows, perhaps the iPhone SE may one day become the #1 selling iPhone?

tl;dr it is possible for a premium luxury manufacturer to continue to grow and expand its business, despite being in a mature industry like autos.

[1] http://press.porsche.com/more_about/statistics/

[2] https://en.wikipedia.org/wiki/Porsche#Production_and_sales

Ya, your point is well made. I think where I would disagree is that cars have always been about identity. Nobody (or very few, at least) people buy a Cayenne because it's fast or performs well. People buy it because they think it says something about who they are. The fact that it's highly performant is just how you rationalize the price to the consumer.

Cars can get away with this because they are so well wrapped up with the presentation and identity of their owners/drivers. To some extent, this is true of phones. But I guess I just don't think it's nearly as much the case as it is with cars. Somewhat ironically, this is because an iPhone is not expensive enough to really say much about the wealth of its owner. At least - not in the way that a car does.

Admittedly, that might be slightly hold less true in developing economies, where the ownership of an iPhone really is something only the (relatively) wealthy can attain. But in that case, their rate of expansion is determined by the rate at which people rise out of poverty. Which I don't think is fast enough to outpace the declining upgrade rates.

1. You could still make money on the short term bet, while BH makes money on the long term bet.

2. BH just doesn't think like that. They don't often invest to sell long term, but are looking for either things that fit into their stable of companies, or are things that are likely to pay a steady dividend over the long run without losing too much value over time.

Since there's no way they're going to be willing/able to acquire a huge stake in AAPL, they're likely planning on just holding onto it and hoping that the dividend + what they sell it at pays back $1B over 10-20 years, which is entirely possible.

Wow- This must be hard for Buffett to explain to Bill Gates- his close friend. Did he ever invest in Microsoft?

I'd be surprised if Bill Gates holds ill feelings towards Apple.

Bill and Buffett are smart enough to know you should keep investments and friendships as two different things.

Well, when Bill was in charge of Microsoft, he had Microsoft invest $150MM in Apple, so.... I'm sure he could care less whether Berkshire Hathaway invests in Apple.

http://on.wsj.com/1sriCf9

Maybe he's gambling on Trump's "onshore your cash or else"

Berkshire has too much money and too few ideas as to what to do with it. Why not the second largest stock with tons of untaxed cash? And they can push for tax amnesty to repatriate it.

Not sure why Buffet decided so late to invest in apple. Returns will not be as high as pre iPod or iPhone era

There's actually nothing to support that conclusion.

But profits are higher than ever.

Comparing to past theoretical entry points to buying Apple is irrelevant. I'm not sure why all of us didn't invest in Apple 10 years ago! Oh, it's because it's easier to predict the last 10 years than the next ten years. Just because investing 10 years ago would have been great, it doesn't mean that in 10 years time a 2016 investment in Apple won't also look great.

>Comparing to past theoretical entry points to buying Apple is irrelevant. I'm not sure why all of us didn't invest in Apple 10 years ago!

Shortsightedness?

Without any hindsight involved, 10 years ago the continuous rise for several years seemed inevitable AT THE TIME.

Now it's not so clear.

But it's not because "it's easier to predict the last 10 years than the next ten years".

Rather it's because it was easier to predict the next ten years in 2006 than it is now.

Since it was so obvious and inevitable to you at the time, I assume you put all the spare money you had into Apple in 2006?

Berkshire Hathaway was down 12% last year, has under-performed the S&P 500 for five years running, bought Apple North of $100, and are heavily invested in the railroads via Burlington Northern which has seen freight revenue dropping for over a year. Which part of this is not true?

> Berkshire Hathaway was down 12% last year

It's easy to cherry pick dates to suit your argument.

  12 months leading to end of 2015: down 12%
  24 months leading to end of 2015: up 11%
  36 months leading to end of 2015: up 40%
  
  ~5.5 months between end of 2015 and today: up 8%

Was your statement true? Yes. Misleading? Even more so.

Your other statements... well maybe you're 100% right and not even misleading on those, but after choosing such a bad statement for your lede I'm not going to bother looking them up.

Edit: Actually I was curious enough to look into one more of your "facts". According to Business Insider, S&P 500 doesn't even come close to beating B.H. But maybe you have better data than them. http://static2.uk.businessinsider.com/image/54f4d8a6dd08955d...

Last year refers to 2015, Jan 1st 2015 = $151 Dec 28 end of year 2015 = $133 Not misleading at all.

>Berkshire Hathaway’s poor performance in 2015 is noticeable due to the huge underperformance relative to the market. But a closer look at the performance of the company over the past three years suggests that this is something that has been going on for some time. Berkshire Hathaway has actually significantly underperformed the market over the past five years, with a return of 61.4% vs. 71.4% for the S&P 500 Growth Index (the index tracks the performance of large-cap U.S. securities with growth characteristics). http://amigobulls.com/articles/has-berkshire-hathaway-lost-i...

Your Business Insider Chart is a chart of a price index from the day he took over Berkshire, things aren't what they used to be, it was my bad that I did not preface Growth Index, but your conclusion that the first statement was misleading is completely incorrect

In my comment I confirm that you were correct to say that it went down 12% in the 2015 calendar year. Correct, but incredibly misleading.

But it wasn't misleading, rather it was you misreading

I didn't misread. If you look at my first reply to you I said this:

> 12 months leading to end of 2015: down 12%

Quite clearly I understood what you meant. And then I explained why the fact you picked was misleading. Not untrue, just misleading.

Is there any stock or asset that would beat the S&P500 on an absolute basis for all time periods? No. Therefore you can play this game with every single asset class, without exception. It doesn't mean anything, and that is why your comment is misleading. Just looking at a selected time-range and finding underperformance doesn't tell you anything at all about the historic performance of an asset.

Over the last 5 years Berkshire has underperformed the S&P 500 Growth

http://amigobulls.com/articles/has-berkshire-hathaway-lost-i...

Certainly the last 5 years tells more of a trend than historic performance. My facts are correct and Berkshire has been on the decline for a while, my opinion its certainly not worthy of being downvoted

Why cherry-pick 5 years? Just look at their performance since inception. It is clearly laid out in their 13F. The company has trounced the S&P over such a long-term it is pretty incredible actually.

http://www.berkshirehathaway.com/2015ar/2015ar.pdf

1964-2015, the S&P500 returned 11,355% and BRK returned 1,598,284%.

p.s. not downvoting you, just disagreeing.

It's not cherry picking the last 5 years its looking at the trend, rather than historical returns of a company to see the direction it is heading.

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