Review Buffett’s “ultimate battle”: four consecutive years heavily positioned in Apple, the use of funds of 230 billion, burst earn twice do not reduce positions

If there is any case, can summarize Buffett’s ultimate “investment wisdom” so far, that should be Apple.

On the evening of November 8, Buffett’s Berkshire Hathaway (later referred to as Bucks County) released three quarterly reports, financial results show that the company’s three quarterly net profit increased 82.4% year-on-year, the performance is quite amazing!

Bucks County’s latest portfolio shows that the company’s stock holdings total $245.317 billion in market value, with Apple alone accounting for $111.7 billion, or about 46% of the company’s market value of its holdings and 31% of the company’s investable capital (market value of holdings + cash).

If nothing else, Apple will be the most important investment of Buffett’s later years, bar none. The stock early twists and turns, late gains huge, the old Barr position long hold not down and other details, but also especially worthy of investors to retrospectively pursue.

First, three quarterly report reproduced high concentration position

On November 8, 2020, Bucks County, a company owned by Buffett, announced its third quarterly report, and the financial statistics show it. The company’s third-quarter net profit was up 82.4% year-over-year, a pretty impressive result.

And their portfolio is once again showing a highly concentrated style. Bucks County’s stock holdings totaled $245.317 billion in market capitalization at the end of the quarter, with the company’s top four holdings accounting for 70% of market capitalization (see chart below).

In order of market capitalization, these were Apple’s holdings of $111.7 billion, Bank of America’s $24.9 billion, Coca-Cola’s $19.7 billion, and American Express’s $15.2 billion.

Perhaps to highlight the heavy holdings, in the notes to the earnings report, Bucks County specifically notes the top four stocks in terms of market capitalization – 70%.

Is this a reiteration of Warren Buffett’s “put your eggs in the strongest basket” investment philosophy?

II. Four heavyweight stocks representing four investment stages

A closer look at this quarter’s overweight stocks is still very intriguing.

The four stocks in Buffett’s third-quarter portfolio happen to be “masterpieces” of Buffett’s various investment periods: American Express in the 1960s, Coca-Cola in the 1980s, Bank of America after 2011, and Apple after 2016.

Buffett’s investment in American Express began in 1964, when American Express was involved in the fraud of the century because its subsidiary guaranteed a pile of soybean oil transactions, sky-high claims to make its company’s net worth plummeted by more than half, Buffett after in-depth research that the core value of the Express – consumer credit remains unchanged, so buy at a low price. He bought three years in a row, and at one point his shareholding reached 40% of the assets of Buffett’s partnership (no other stock accounted for such a high percentage), and he also became a shareholder of more than 5% of Amex (as Apple is today). Amex went up 80 times in the following decades.

The attached chart shows American Express through the last 43 years, with the stock price at post-restore price.

Coca-Cola in the 1980s is much more recognizable. Unlike Amex, Buffett added to his position in the middle of Coca-Cola’s market and bought as it went up (very similar to Apple today), reversing the two main strategies of contrarian buying and “cigarette butt” investing. It’s more of a “15% Fisher” approach (i.e., a growth investing approach). At his peak, Buffett owned over 200 million shares of Coca-Cola, or more than 8% of Coca-Cola, and made 35 times more money on the stock.

The attached chart shows Coca-Cola’s trend over the past 34 years, with the stock price at post-reversal prices.

Buffett’s investment in Bank of America (also known as Bank of America) reflects the characteristics of Buffett’s “prime years”, holding a huge amount of assets, facing the test of the once-in-a-decade financial crisis, how to seize the opportunity?

Turning the clock back to 2011, three years after the full-blown subprime mortgage crisis, with Bank of America’s stock plummeting and in jeopardy, Buffett stepped in and agreed to make a capital investment in Bank of America. But the conditions are: $5 billion in capital contributions in the form of preferred stock, entitled to 6% annual dividends, while this investment can be converted into common stock before 2021 at a price of $7.14. In the future, this particular “preferred shares + call option” purchase method to help Buffett hedge a lot of risk. Bank of America followed from a low of $5 down to $2, and then soared 17 times so far, even at Buffett’s option price of 7.14, also rose a full 4 times more.

The accompanying chart shows Bank of America’s trend over the past decade, with the stock price as post compounded

Third, the most profitable variety?

Of course, it’s Buffett’s investment in Apple that is most worth summarizing, an investment that began in 2016 and continues to be the most significant investment under Buffett’s ownership.

As of the end of the 3Q, Barclays held 966 million shares of Apple, with a market value of more than $111.7 billion, and Barclays earned more than $77 billion (more than RMB 500 billion), a profit of more than 220%, destined to become the most profitable in Buffett’s investment career.

The attached chart shows the Apple Supply Company’s trend over the past five years, with the stock price at the former compound price.

Buffett was nearly 87 years old and in his twilight years when he bought Apple in a big way. But the decision-making style is still stern. Bucks County opened to buy Apple since early 2016, the first 9.8 million shares for the investment manager to buy. Since then are Buffett’s hands-on operations. 2016 late to the end of March 2017, within just a few months Bucks County built a position in Apple nearly $10 billion, at an average cost of about $100 at the time price, after Apple rose more than 11 times in a decade, but Buffett bought without pressure.

Since then, but whenever Apple has a pullback or long-term flattening Buffett inevitably large positions, adding 36 million shares in the fourth quarter of 2017, and nearly 75 million shares in the first quarter of 2018, and 12.38 million shares in the second quarter of 2018.

Cumulatively, Bucks County bought a total of 250 million shares of Apple at a total cost of more than $35 billion, and the market value of the position topped out at around $120 billion.

Four important details worth recalling

The reason why Buffett’s purchase of Apple is of interest is also because it is a rare case in recent years where Buffett has taken a heavy position in the secondary market and made significant profits, and many details of this investment are different from its past, so it is particularly studyable.

One of the details is the extraordinarily large market value of the holdings. Prior to buying Apple, Bucks County’s largest investment in the last two decades was the 2009 purchase of BNSF (Burlington Northern Santa Fe Railroad), a company that went private and delisted in 2019, and the profitability of that investment is subject to debate and not the subject of this article. But with Apple’s $110 billion volume position today, even if BNSF does go public, it’s hard to say that Apple will necessarily be any worse off than it is.

Details of the second, position concentration is very high. Buffett has always advocated “putting your eggs in a sturdy basket,” but such a high concentration of investment as Apple’s is extremely rare in history.

The third of the details, the high intervention. Buffett bought Apple at a time when Apple has risen 11 times in the past nine years, Buffett can be said to have built a position at a high level, which is different from when it bought Amex, Hissy, Bank of America and other cases, more similar to Coca-Cola. But the difference between Apple and Coca-Cola is that it has a higher technology attributes, buy the P/E ratio is also higher.

Detail number four, never cash in on earnings. Buffett bought Apple’s important cost area in the 95 ~ 180 U.S. dollars near, and in August this year, the highest price of Apple had touched 515 U.S. dollars above, such short-term rich profits, in the eyes of many value investors will consider cashing profits, but Buffett did not.

From its specific trading situation, Buffett in the four-year investment period, in addition to a small amount of selling (less than 2%), almost no decent reduction action, all the way to hold so far, even if the apple position as high as the P/E ratio has reached an all-time peak, but Buffett did not exit.

V. How to interpret Buffett’s investment code

Warren Buffett’s exposition of his investment philosophy can be described as sweaty. And the study of his investment ideas is piecemeal. But writing articles easy, do investment difficult, in the end Buffett is now what kind of investment thinking is really worth recalling.

In fact, before Apple’s significant profits, Buffett’s investment is not particularly bright. Not to mention the investment in the four major U.S. aviation stocks ended in a loss. In terms of Buffett’s 3Q report, without Apple’s surge, Berkshire’s other heavyweight stocks can make the company lose nearly $20 billion.

But from another perspective, Buffett’s portfolio of holdings has its own logic.

First of all, Buffett is clearly a thoroughly fundamentally driven investor, rather than a price-driven one, as can be seen from both the failed airline stock investment and the profitable Apple. To some extent, in later years Buffett is using valuation levels less and less as a guide to selling.

Second, Buffett’s allocation size for each individual stock is more determined by opportunity to capital capacity, and less by concentration ratio, even though Bucks County’s near-universal capital capacity remains so. This approach is completely inconsistent with the operations of mainstream institutions, but it is very Buffett indeed.

Third, Buffett began to think more about subprime investment opportunities because of his capital capacity. He now owns shares of Coca-Cola, American Express, Bank of America, etc., which obviously aren’t as good as Apple, but he still does. But combined with his already huge cash reserves, this constitutes the very interesting conclusion that Buffett also distinguishes between buy and hold criteria. This may be Buffett’s investment habit in constructing his portfolio.

It is worth noting that the latest share price of Berkshire A shares, compared to the beginning of the year $339,590 is still down 7.57%, which may be held in his hand over a hundred billion dollars of concern, but perhaps more of the future “stock god” is still how long to guide the Bucks County company investment concerns. After all, gods don’t come often, and successors are hard to find.