1 overlooked reason Warren Buffett’s made so much money by investing in Apple
Since Warren Buffett bought Apple (NASDAQ:AAPL) shares in 2016, the stock’s gone from around $23 to $242. That’s a 952% return without including dividends.
A lot of Buffett’s success comes down to buying quality shares at good prices. But investors hoping for similar results often overlook a reason that I think might be even more important.
Holding
Charlie Munger – Buffett’s former right-hand man at Berkshire Hathaway – used to say investment returns don’t come from buying or selling. They come from holding.
Berkshire’s Apple investment’s an example of this. Since 2016, the stock’s looked expensive on several occasions, but selling at any of these times would have been a mistake.
For example, the share price hit an all-time high of $124 in August 2020. But an investor who sold back then would have missed out on around half the gains achieved by holding until today.
Equally, the stock looked expensive in November 2020 at a price-to-earnings (P/E) multiple of 40. But the share price has more than doubled since then, rewarding investors who didn’t sell.
There’s a clear lesson here for investors. Even when a stock looks expensive, it might well have further to go if the underlying business can keep growing.
This is why the ability to avoid selling can be so important to overall investment returns. Despite this, Buffett’s been aggressively reducing Berkshire’s stake in Apple this year.
When to sell?
Buffett holding Apple stock even when it looked expensive has generated returns that would otherwise have been missed. But this doesn’t mean selling is always a mistake.
With any company, it’s possible for its stock to trade at a price that is higher than the value of the underlying business. And in that situation, shareholders should think carefully.
Is this the case with Apple? It might be – there are some big issues facing the company at the moment and investors should consider these before working out what to do.
One is the political environment. Tense relationships between the US and China are a potential issue for the iPhone manufacturer both in terms of its production base and its customers.
Another is the US Department of Justice winning its case accusing Alphabet of being an illegal monopoly. This could have implications for the fees it pays to Apple to maintain this status.
These are reasons to consider selling, but there’s still strong growth coming from the firm’s services division. And this means investors have to be careful about the risk of selling too early.
The lesson for investors
Finding great investment opportunities isn’t easy, but this is only one part of getting good returns from the stock market. The other part is avoiding selling them too early.
With Apple, Buffett said in May that the decision to reduce Berkshire’s stake was due to tax reasons. And I’m inclined to take this at face value, rather than looking for a deeper meaning.
That means I think investors considering selling should weigh up the firm’s growth prospects carefully. And while the shares might look expensive, that isn’t a good enough reason by itself.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Apple and Berkshire Hathaway. The Motley Fool UK has recommended Alphabet and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
