While some of the renowned investors have been talking about downside of investing in Apple, Warren Buffett has been doing something different.
No technology please
For years he propagated that because he does not understand technology, he does not invest in those stocks. He famously stayed away from the internet boom (and the subsequent bust), and had the last laugh. People admired him even more.
Oh sure
Alas, he bought Apple stock in May 2016 and then again in August. No, he cannot say that it was his managers who bought it. I don't buy the argument that he let them deal with the billions themselves without his approval. Who's kidding who here?
Why's it now
This article mentions the real reason Buffett may have bought Apple. Those noted include:
This article mentions the real reason Buffett may have bought Apple. Those noted include:
1) Apple is no longer a fast grower;
2) Apple has now become an old fashioned value stock;
3) Apple is no longer a technology stock; it is a consumer staple;
4) Apple now is a clear contrarian play.
Well, the author may have come up with some good reasons to perhaps buy the Apple stock. However, I don't think that those are the real reasons for Buffett to be interested in Apple. Why didn't he buy Microsoft on similar grounds? Don't give a bull like his friendship with Bill Gates would have been a conflict of interest. Why not Oracle, or many other slow growth, yet sort of stable, technology stocks? If we have the will, we can come up with reasons backing our will.
The real reason that Buffett has changed the course is this:
He had better investment ideas when he was dealing with smaller sums of cash in earlier years. He stuck to his philosophy of buying businesses he understood, which had sustainable competitive advantages. The outcome was admirable. He did not have to payout dividends or do buybacks for he supplied superior returns to the shareholders through his capital allocation skills.
Today with $20 b plus cash coming out each year, he is in denial: That he can still continue to deploy capital at a rate that is better than the market. That his rate of return is going to be higher than his fellow shareholders; that his opportunity cost is higher than theirs. He is in denial that Berkshire does not need to payout dividends at all; there is no need to consider buybacks at terms different from his earlier formula.
Buffett and his market
I have noted my thoughts about Berkshire earlier. Whether it is going to lag the market is a question we can answer in hindsight only.
In the last decade, Berkshire's market performance compared to the market itself is not too bad.
Purchase in 2000: Berkshire's market price per share increased by 7.06% annually since 2000 compared to 5.01% for S&P-500 (including dividends). That is good for someone who bought in 2000 and held through 2015. If sold in 2005, the returns would be 4.52% for Berkshire compared to 0.54% for S&P-500. That's a big margin, what I called Buffet's last laugh on the dot-com bust. It would be 5.41% and 1.42% if sold in 2010.
Purchase in 5-year periods: What if the return is compared over the previous 5-year period? If purchase was in 2005 and sale was in 2010, the return would be 6.31% for Berkshire and 2.30% for S&P-500. So far so good for Buffett.
In the last 5 years though Buffett seems to have lost the edge. If the stock was purchased in 2010 and held through 2015, the return would be 10.42%; not bad at all. However, if the cash was invested in S&P-500 instead, the return would be 12.57% dividends included. Perhaps the investor would have been better off if the index was preferred to Buffett.
The desperation
Yet, Buffett is a bit desperate today. He needs more ideas where he can deploy those continuing excess cash flows; and hey, they are not forthcoming as frequently as they used to before; and that is not his fault. Though his fault lies in denying to accept that fact.
He bought Apple stock because he became desperate, and defied his own philosophy. It does not matter whether the stock does well or not.
The lack of edge
The key question now to deal with is: In whose hands that excess cash is going to be more valuable - Buffett or shareholders? If value of a business is the present value of excess cash discounted at the rate that is appropriate, it will be higher with those who can increase that cash at a higher rate over a long period.
Buffett or his fellow shareholders, who's got the answer?
He had better investment ideas when he was dealing with smaller sums of cash in earlier years. He stuck to his philosophy of buying businesses he understood, which had sustainable competitive advantages. The outcome was admirable. He did not have to payout dividends or do buybacks for he supplied superior returns to the shareholders through his capital allocation skills.
Today with $20 b plus cash coming out each year, he is in denial: That he can still continue to deploy capital at a rate that is better than the market. That his rate of return is going to be higher than his fellow shareholders; that his opportunity cost is higher than theirs. He is in denial that Berkshire does not need to payout dividends at all; there is no need to consider buybacks at terms different from his earlier formula.
Buffett and his market
I have noted my thoughts about Berkshire earlier. Whether it is going to lag the market is a question we can answer in hindsight only.
In the last decade, Berkshire's market performance compared to the market itself is not too bad.
Purchase in 2000: Berkshire's market price per share increased by 7.06% annually since 2000 compared to 5.01% for S&P-500 (including dividends). That is good for someone who bought in 2000 and held through 2015. If sold in 2005, the returns would be 4.52% for Berkshire compared to 0.54% for S&P-500. That's a big margin, what I called Buffet's last laugh on the dot-com bust. It would be 5.41% and 1.42% if sold in 2010.
Purchase in 5-year periods: What if the return is compared over the previous 5-year period? If purchase was in 2005 and sale was in 2010, the return would be 6.31% for Berkshire and 2.30% for S&P-500. So far so good for Buffett.
In the last 5 years though Buffett seems to have lost the edge. If the stock was purchased in 2010 and held through 2015, the return would be 10.42%; not bad at all. However, if the cash was invested in S&P-500 instead, the return would be 12.57% dividends included. Perhaps the investor would have been better off if the index was preferred to Buffett.
The desperation
Yet, Buffett is a bit desperate today. He needs more ideas where he can deploy those continuing excess cash flows; and hey, they are not forthcoming as frequently as they used to before; and that is not his fault. Though his fault lies in denying to accept that fact.
He bought Apple stock because he became desperate, and defied his own philosophy. It does not matter whether the stock does well or not.
The lack of edge
The key question now to deal with is: In whose hands that excess cash is going to be more valuable - Buffett or shareholders? If value of a business is the present value of excess cash discounted at the rate that is appropriate, it will be higher with those who can increase that cash at a higher rate over a long period.
Buffett or his fellow shareholders, who's got the answer?
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