It's hard to argue with the idea Warren Buffett is the greatest living investor. His Berkshire Hathaway (BRK.A -0.72%) (BRK.B -0.67%) has generated a 20.1% compounded annual return since he took over the company in 1965, compared to a 10.5% return by the S&P 500 index.
There's a reason he's called the Oracle of Omaha, and it's why many investors follow his every stock move, but often Buffett's investing advice is more one of "do as I say, not as I do." For example, he once derided derivatives as weapons of financial mass destruction, yet invested in them himself. He also said he hated the railroad and airline industries, but invested heavily in both himself.
An apple a day
Buffett is also not a fan of a diversified portfolio, telling Berkshire shareholders in 1996, "diversification is, as practiced generally, makes very little sense for anyone that knows what they're doing. It is a protection against ignorance." He said investing in just three stocks is probably all anyone needs to do.
While Berkshire Hathaway does own dozens of companies because of the vast sums of money he invests, Buffett has put most of his eggs into one basket: Apple (AAPL -0.37%).
The conglomerate owns almost a billion shares of the tech stock (another sector he once said he wouldn't invest in), which amounts to a 5.6% stake in the company, but its $147.2 billion market valuation means it represents 41.8% of Berkshire's own total portfolio.
But that raises the question of whether you should follow his lead. Should you sink almost half of your portfolio's value into Apple stock, or for that matter, should you make any stock that large of a position in your portfolio?
A unique business
Apple is probably a stock that everyone could own. Few companies are as iconic and possess as loyal a following as the tech giant does. Dip a toe into the Apple ecosystem and you immediately feel the pull of the undertow dragging you deeper in.
Consumers willingly pay a hefty premium for Apple products because of their quality, interconnectedness, and styling. It's why it was just able to report rising sales in its second quarter despite the headwinds impacting its business and industry.
Revenue rose to a record $83 billion for the period, up 2% year over year, as product revenue rose 7% to $77.5 billion and service revenue reached a record $20 billion, a 17% increase. While product margins contracted, mostly due to unfavorable currency exchange rates, Apple continues to produce significant operating cash flows, some $23 billion for the quarter. It enables Apple to easily pay its quarterly dividend of $0.28 per share, which yields a modest 0.6% annually.
With that amount of cash available to it, not only is the payout quite sustainable, but also has room for growth in the years to come.
Product and service feed off each other
Apple, of course, is best known for its consumer electronic products, initially its Mac computers, which are still a big seller, but lately for the iPhone, which manages to regularly surpass analyst expectations for growth.
While it does not break out sales anymore for the iPhone, CFO Luca Maestri did note the device achieved an all-time high for installed base of active devices, and CEO Tim Cook noted, "On iPhone, there was no obvious evidence of macroeconomic impact during the June quarter."
In fact, Strategy Analytics says Apple had its best second-quarter market share for smartphones in 10 years, as shipments swelled to 47.5 million, giving Apple a 16.3% share.
Yet much of Apple's future is in services and how well it's able to monetize its customers. So far, business is booming. As Maestri pointed out, "The record level of performance of our services portfolio during the June quarter reflects the strength of our ecosystem on many fronts."
Apple now has more than 860 million paid subscriptions across the services on all of its platforms, up over 160 million -- 23% -- over the last 12 months.
Too much of a good thing
So it's clear why Buffett (and many others) loves Apple so much, but it's not intuitive that you should make as large of a bet on it as he did, even if you do want to buy in. Even a company as good as Apple is going to go through rough times periodically, and such concentration means any hiccup could obliterate years of work to save and invest.
Diversification provides a buffer against your entire portfolio cratering. Also, having billions of dollars at your disposal to put into the market makes it easier to recoup if your bet goes south. Putting almost half your retirement portfolio into one stock is a lot riskier, and one most investors shouldn't take.
Following Buffett's stock moves is fine up to a point. Hedging your bets on a market crash by diversifying your investments still makes the most sense.