When news broke that Warren Buffett’s Berkshire Hathaway had sold about $7.4 billion worth of Apple shares in the fourth quarter of 2020, the knee-jerk reaction was bearish.
The stock dipped 1.7% on the day of the announcement, followed by a 0.9% decline the next day. Headlines like “Berkshire Cuts Apple Stake” and “Why Did Warren Buffett Sell Apple Shares?” may have hinted at the Oracle of Omaha’s lack of confidence in the Cupertino company.
But I explained why Berkshire Hathaway’s fourth quarter transaction was more of a position trim than a bearish statement. Here is a quote from my recent article that offered a different perspective on what had been going on:
“First, 43% of $277 billion is still quite a bit of money. [Also,] Apple stock was worth a whole lot more at the end of the fourth quarter compared to the third: $132 vs. $115 per share. Therefore, Berkshire’s total investment amount in Apple did not decrease between the two periods. In fact, it increased from $111 billion to $120 billion.”
Buffett’s increasing stake in Apple
The idea that Buffett and his team are more bullish on Apple than many might think was reinforced by the oracle himself.
In his letter to shareholders, Mr. Buffett explained why, despite recently selling Apple, the conglomerate is even more committed to the Cupertino company now than it had previously been. The trick has been accomplished through share repurchases:
“When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple. […] Since then, we have […] pocketed $11 billion by selling a small portion of our position. Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.”
When less is more
The math can be confusing, but it makes sense. Berkshire owns more of Apple now than it did in 2018, despite having trimmed its position, primarily because it sold shares at a slower pace than Apple repurchased its own stock in the past three years.
Here is a simple analogy: imagine a cake that is about to be shared equally among ten people. But plans change, and five people have to leave the party early. Now, each remaining person gets allocated one-fifth of the cake, rather than the original one-tenth. Even if one partygoer (let’s call him “Warren”) chooses to give up a small piece of his slice, he is still entitled to more cake now than before.
For more on the “magic” of share repurchases, check out the Apple Maven’s article on the subject, published in June 2020. As a fun fact, I estimate that buybacks have accounted for between one-sixth and one-fifth of Apple’s stock price appreciation over the past decade.
As bullish as it gets
Warren Buffett’s letter makes it crystal clear: Berkshire Hathaway is as bullish on Apple as it has been, at least since 2018. The company continues to allocate a sizable chunk of its portfolio to the Cupertino company’s stock, as the chart below depicts:
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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)