Over the past decade, Berkshire Hathaway (BRK.A -0.67%) (BRK.B -0.87%) CEO Warren Buffett has faced his fair share of criticism. Whereas the benchmark S&P 500 has gained 197% over the trailing 10-year period, Berkshire Hathaway's stock has galloped higher by "only" 151%, representing a 46-percentage-point underperformance.
But in Buffett terms, a decade can be a relatively short time frame to gauge investment performance.
Looking back over the Oracle of Omaha's more than five-decade tenure at Berkshire Hathaway, he's absolutely crushed the S&P 500 in aggregate returns. On a compound annual growth basis, Berkshire's return of 20.3% more than doubles that of the S&P 500 (10%) -- and that's including dividends paid. On an aggregate basis, it's led to a better than 2,700,000% outperformance of the S&P 500.
In other words, suggesting that Warren Buffett has lost his touch or doesn't have what it takes to invest in today's market would be a premature to outright incorrect statement. And if you need additional proof, just take a closer look at Buffett's investment in tech giant Apple (AAPL 0.19%).
Apple has grown into a monster position for the Oracle of Omaha
In May 2016, Berkshire Hathaway began building a positon in Apple, which today stands at north of 250 million shares owned, or approximately 5.8% of Apple's outstanding shares. This position comes with an initial cost basis of $35.29 billion, according to Berkshire's 2019 annual shareholder letter. However, following Apple's stellar fiscal third-quarter operating results last week, Berkshire's stake has swelled to $106.63 billion.
Allow me to put this four-year gain into context. First off, Buffett has made more than $71 billion, on an unrealized basis, by purchasing and holding Apple stock. Mind you, this doesn't include the dividends his company is receiving, which should total $822.8 million just in 2020. Adding these dividends would push Buffett's unrealized and realized gain well above $73 billion. In four years, Buffett has made more on Apple than the market caps of 417 out of the 500 S&P 500 companies.
If that's not a crazy enough statistic for you, how about this: Apple now comprises 45.4% of Buffett's invested assets. As of this past weekend, Buffett's 46-security investment portfolio was worth $234.75 billion, with Apple accounting for $106.63 billion. Buffett has never been a big fan of diversification, as long as you know what you're doing, and it clearly shows with his current investment allocation.
Buffett has zero incentive to sell or pare down his Apple stake
But just because Apple has ballooned to 45% of Berkshire Hathaway's investment portfolio, and it accounts for a little over 22% of Berkshire Hathaway's $476 billion market cap, don't expect the Oracle of Omaha to sell his stake anytime soon.
Back in a February interview with CNBC, Buffett stated that he views Apple "as our third business." He went on to say that, "It's [Apple] probably the best business I know in the world. And that is a bigger commitment that we have in any business except insurance and the railroad." It's an incredibly strong statement from Buffett that demonstrates his long-term resolve.
You see, Apple is one of the most recognized and valuable brands in the world, which is evidenced by any of its product launches. Anytime Apple launches a new version of the iPhone, consumers line up around the block for their chance to get their hands on it. This almost cult-like following works in Apple's favor by keeping consumers within its sphere of products and services. This is to say that even if some of Apple's products and services aren't successful, they still work to draw in new consumers and keep existing customers within its ecosystem.
Beyond having sustainable innovative and brand-name competitive advantages, Buffett is also very fond of Apple's management team. Tim Cook has transformed Apple during his nine years as CEO, pushing the company into higher-margin and faster-growing wearables and services, while also taking on debt at exceptionally low lending rates to finance common stock buybacks. Over the trailing five years, Apple has repurchased approximately 1.37 billion shares, thereby lowering its outstanding share count by almost 24%. Buffett is a big fan of Apple's buyback policy.
Apple is holding up its end of the bargain, too
Then again, long-term conviction is just one piece of the puzzle as to why Buffett is up $71 billion on Apple in four years. It also means Apple is holding up its end of the bargain and delivering for its shareholders.
Beyond its aggressive capital return program, Apple should be applauded for its resilience in the face of the biggest economic disruption since the Great Depression. Apple's sales grew 11% in the June-ended quarter, with the most impressive growth being seen in its high-margin wearables and services segments, which Cook has really been pushing. Wearables and accessory sales jumped close to 17% from the prior-year period, with services revenue not too far behind (a year-on-year increase of 15%). Services are especially important since margins are higher and revenue recognition less lumpy than Apple's traditional products.
Also key to Apple's success is the company's innovation. Though Apple has done an excellent job of growing its streaming and cloud storage services, what's really exciting is the company's potential to disrupt digital health monitoring or become a major playing in artificial intelligence (AI). You're likely already familiar with Siri, but Apple will be using increasing its usage of AI for facial recognition, text translation, and App Library suggestions, among other tasks.
Apple's latest operating results offer no indication that it's anywhere near a peak, which means it could grow into an even larger piece of Warren Buffett's investment portfolio in the months and years that lie ahead.