Throughout history, few investors have had the level of success of the Oracle of Omaha, Warren Buffett. The CEO of conglomerate Berkshire Hathaway (BRK.A 0.02%) (BRK.B -0.04%) and its $221 billion in assets under management once had nothing more than $10,000 in seed capital a little over six decades ago. However, Buffett's steady approach of identifying undervalued business models with strong moats and hanging onto them over the long run has worked out well. Today, the Oracle of Omaha has a net worth of close to $81 billion. Not too shabby!
But even the greatest investors come under scrutiny from time to time, and that includes Warren Buffett.
Here we go again?
In recent weeks, Buffett and Berkshire Hathaway have taken heat for a 252.5 million share position in the king of innovation, Apple (AAPL 0.83%).
Earlier this month, Apple lowered its holiday quarter sales guidance to $84 billion from a previous forecast of $89 billion to $93 billion, and well below the Wall Street consensus of $91.5 billion. The company cited a significant slowdown in China iPhone sales as the primary reason why revenue would miss the mark. Said Apple CEO Tim Cook in a letter to shareholders, "While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China." A combination of higher iPhone price points that were too much for consumers, and the ongoing trade war between the U.S. and China, really did a number on Apple in the fourth quarter.
Following its warning, Apple shares dipped to as low as $142, which was more than $91 per share off the company's all-time high. With nearly 252.5 million shares owned, this worked out to a paper loss of $23 billion at its peak for Buffett's company. Following a slight bounce, the decline stands at $21 billion through Jan. 8.
More so, it has investors worried that Buffett, who has historically avoided the technology sector, could be looking at IBM (IBM) version 2.0. After building a hefty position in IBM with the belief that growth in its cloud division would lead to a higher share price, Buffett eventually conceded after years that investing in IBM was a mistake. IBM's legacy operations and late entrance into the cloud continue to hamper its performance to this day, and Buffett's decision to invest in the company wound up costing Berkshire Hathaway a pretty penny by the time it disposed of its stake.
But is that really the case with Apple? Probably not, for a variety of reasons.
Buffett's Apple "losses" aren't as bad as you think
To begin with, Berkshire Hathaway and Buffett have been building a position in Apple over time. It's not as if Buffett simply came along and bought 252.5 million shares of Apple all at once and that was that. Berkshire has been regularly buying or nibbling on Apple's stock since the first quarter of 2016.
How do we know this? Since Berkshire Hathaway has more than $100 million in assets under management, it's required to file Form 13-F with the Securities and Exchange Commission 45 days after the end of the previous quarter. This form discloses the equity holdings of Berkshire Hathaway, thereby letting Wall Street and investors know what the most successful investor in history and his investing team were up to recently.
Although we don't know with any specificity when Berkshire Hathaway made its purchases within a quarter, or what the average price paid was, we do know that 130.2 million shares of Apple stock was bought between Jan. 1, 2016, and March 31, 2017. Throughout the entirety of this 15-month period, Buffett would have been able to gobble up its shares of Apple between $90 and $145. For context, Apple closed at almost $151 on Tuesday, Jan. 8, 2019. Therefore, Apple is up on an unrealized basis on more than half of the shares Berkshire Hathaway currently owns.
Another roughly 110 million shares of Apple stock was acquired between April 1, 2017, and March 31, 2018, at between $142 and $180 a share. True, some of these purchases may be down a bit at the moment, but they're far from deep in the red.
Comparatively, only 522,902 shares (0.2% of the current Apple holding) were added between July 1, 2018, and Sept. 30, 2018, which is when Apple's stock soared from $183 to $229.
In other words, a broader look at Berkshire's buying habits suggest that not only is Buffett not taking a bath with Apple, but that he may actually be nominally up on his overall position.
Don't forget the dividends!
And that's not all.
Most folks continue to overlook that Apple, which is overflowing with operating cash flow, pays a healthy dividend. Taking into account Berkshire's owned shares of Apple at the end of each quarter, per its 13-F filings, and assuming that Buffett didn't sell a share of Apple in the fourth quarter, the Oracle of Omaha would have collected just over $1.1 billion in aggregate dividends between the beginning of 2016 and the end of 2018. This further bolsters the probability that Buffett may be profitable on its Apple stake, and if it isn't that its nominal loss is pretty small.
Buffett hasn't given up on Apple, and I don't believe Wall Street should, either. Even if we've seen the iPhone growth trend soften, it's not as if Apple won't be generating significant cash flow that can, in time, be returned to shareholders as a mammoth quarterly dividend.
Plus, this is still the king of innovation we're talking about here. Apple has the ability to pivot its focus to high-margin services that drive growth in the future, rather than being reliant on hardware, as it's been for the past decade.
In short, don't cry for Warren Buffett or Berkshire Hathaway. They're doing just fine with their existing position, and this recent dip in Apple's stock could be a gift for Buffett, who's known for gobbling up shares of brand-name businesses at bargain prices.
Check out the latest Apple earnings call transcript.