Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) CEO Warren Buffett has a penchant for making money. Since becoming CEO in 1965, he's created more than $790 billion in value for shareholders (himself included), as well as overseen an aggregate return on the company's Class A (BRK.A) shares of 4,355,005%, through March 27, 2022.
While there are numerous reasons for the Oracle of Omaha's success, they all effectively boil down to making smart investments and acquisitions. The following three investments are arguably Buffett's greatest of all time.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Greatest nominal dollar return: Apple
In terms of nominal dollar returns, there's little question that tech-kingpin Apple (AAPL -1.22%) takes the crown.
According to Berkshire Hathaway's 2021 annual shareholder letter, Buffett's company spent $31.089 billion to acquire 907,559,761 shares of Apple. For those of you keeping score at home, this works out to a cost basis of $34.26 a share. But as of the closing bell on March 25, Apple's shares were changing hands at $174.72. This equates to a market value of approximately $158.6 billion and an unrealized gain totaling $127.5 billion.
Keep in mind, the above unrealized gain doesn't factor in the nearly $800 million in dividend income Buffett's company is generating annually from owning more than 907 million shares of Apple, nor does it account for the small percentage of Apple shares Berkshire previously sold at a profit.
These incredible returns are primarily a function of Apple's innovation. Based on data from Counterpoint, Apple accounted for 56% of all U.S. smartphone sales during the fourth quarter. That was up from 40% in the third quarter of 2020. Since introducing 5G-capable iPhones, the market-share gap between Apple and Samsung, the No. 2 in U.S. smartphone share, has grown from 10 percentage points to 34.
Apple CEO Tim Cook is also overseeing a long-term evolution that'll focus the company's attention on subscription services. A bigger emphasis on services can reduce the revenue lumpiness associated with product-replacement cycles, as well as lift the company's margins over time.
Warren Buffett is a big fan of Apple's hearty capital-return program, too. Apple has spent hundreds of billions of dollars repurchasing its shares and also raised its dividend multiple times. As long as the company continues to innovate and reward shareholders, I don't believe we'll see Buffett or his investment team pare down this enormous stake.
Image source: Getty Images.
Greatest return from an acquisition: GEICO
Whereas Apple is Buffett's greatest nominal dollar investment of all time, insurance company GEICO is unquestionably Berkshire Hathaway's greatest acquisition in history.
It all began in 1976, when the Oracle of Omaha's company made a $23.5 million investment in GEICO ($4.1 million in common stock and the remainder in convertible preferred stock). With additional investments made in subsequent years, Berkshire owned a third of the company, while having invested about $46 million by 1980.
Following a steady stream of stock buybacks throughout the 1980s and the first half of the 1990s, Berkshire's stake in GEICO grew to around 50%. In 1996, Buffett's company acquired the 49% stake it didn't already own for $2.3 billion. In total, close to $2.35 billion was spent investing in and eventually acquiring GEICO between 1976 and 1996.
How much is GEICO worth today? It really depends on some inexact science. As my Foolish colleague Billy Duberstein pointed out in 2019, Berkshire acquired GEICO for 15.2 times pre-tax earnings and a price-to-sales ratio of 1.54. If we average GEICO's pre-tax profits and sales between 2019 and 2021 (I'm averaging these three years due to the impact of COVID-19), we arrive at a valuation of $31.4 billion (based on the 15.2X earnings multiple) to $55.6 billion (based on a 1.54 price-to-sales multiple). This equates to a gain relative to total cost of between 1,236% and 2,266%. In nominal dollars, we're talking about a $29 billion to $53 billion increase in value.
Over 45 years later, GEICO still checks all the boxes Buffett would look for in an insurance stock. It has a well-known brand name and, most importantly, it's had no issue passing along premium price hikes, when necessary. While its pre-tax earnings have been all over the board over the past couple of years due to COVID-19, it continues to be a profitable and foundational pillar in the eyes of Buffett.
Image source: Getty Images.
Greatest percentage gain from an existing investment: Moody's
The third all-time great investment from the Oracle Omaha, at least in terms of percentage gain for an investment that wasn't wholly acquired, has to be ratings-agency Moody's (MCO 0.02%).
Moody's has been a continuous holding for Berkshire Hathaway since it was spun off from Dun & Bradstreet in 2000. Based on Berkshire's annual shareholder letter, the company outlaid $248 million to acquire 24,669,778 shares of Moody's. This works out to a cost basis of $10.05 per share. But with Moody's ending last week at $330.51, Berkshire's initial investment is up by nearly 3,200%!
But there's a catch: I'm not including the profits Berkshire Hathaway booked from paring down its Moody's stake over the past 21-plus years and haven't accounted for the dividends Moody's has paid over that time. If we include the dividends paid since Moody's made its debut as a public company in October 2000, Berkshire Hathaway's total return on its remaining Moody's shares is very close to 4,000%!
There are two key reasons Moody's has been such an amazing investment for Warren Buffett. To start with, a decade of falling interest rates encouraged businesses to borrow in order to hire, acquire, and innovate. A big uptick in corporate debt issuance, especially as lending rates hit historic lows over the past couple of years, kept Moody's ratings agency busy.
The other key catalyst for Moody's has been its fast-growing analytics segment. This division is tasked with helping businesses assess economic and credit risks, as well as maintain regulatory compliance. You can imagine how handy Moody's services have been during a pandemic, the China-U.S. trade war, and the Great Recession between 2007 and 2009.
Even with the Federal Reserve raising interest rates, both of Moody's core operating segments should continue to generate mid- to high-single-digit sales growth.
