Of all the great investments Warren Buffett's Berkshire Hathaway (BRK.B -0.68%) has made, few have been more successful than Apple (AAPL 1.27%). Throughout its ownership, Berkshire has done things all investors should take note of: It added to a winner and did not sell even though the stock had increased in price.
However, there comes a time when every portfolio manager should trim their positions, and Apple is certainly at that point for Berkshire. Read on to learn the lessons investors can learn from this and why it may be a great time to reduce your exposure to Apple stock.
Buffett isn't as concerned about diversification as others
Part of the reason Berkshire buys and holds Apple is that Buffett prefers to own businesses, not stocks. Because Apple's business has done so well, he's seen no reason to sell the stock. In fact, he added nearly 334,000 shares (about $55 million worth) during fourth-quarter 2022. This brings Berkshire's Apple stake to 915 million shares, worth more than $150 billion -- about 23% of Berkshire Hathaway's market cap.
This level of concentration may be something that most investors shouldn't try to copy.
If something happens with Apple -- say it produces a lousy phone that destroys its reputation, or someone launches a groundbreaking product that usurps Apple from its throne -- Berkshire is poised to post significant losses in its investment portfolio. With Apple making up nearly 45% of Berkshire's portfolio, it's safe to say it's heavily concentrated into that stock.
Image source: The Motley Fool.
However, Buffett likely doesn't care about concentration, as he once said: "You know, we think diversification is -- as practiced generally -- makes very little sense for anyone that knows what they're doing... it is a protection against ignorance."
Essentially, Buffett is stating that if you've done your homework and know that a stock has upside and is protected from downside risk, there's no limit to how much of your portfolio should be devoted to that stock. For most investors, this may not be the best strategy. Likely, running your retirement portfolio or brokerage account isn't your day job, so you can't keep daily tabs on every company you own.
On the other hand, a company with vast resources like Berkshire Hathaway can. So if something goes wrong, it can get out of the position (although dumping $150 billion worth of Apple stock on the market would undoubtedly cause some panic).
Regardless, I think trimming Berkshire's Apple position would be prudent right now, as its financials are beginning to turn south, and its valuation is quite high.
Apple's stock is expensive
In Apple's first quarter of fiscal year 2023 (ending Dec. 31, 2022), its revenue fell 5.4%. While management noted iPhone 14 shortages during the holiday season, it's still worrisome that Apple's revenue is moving in the wrong direction.
With the consumer's dollar getting stretched thin thanks to inflation and soaring housing costs, expensive devices like iPhones and their accessories may be on the chopping block for many. Investors likely won't see the full effect for at least a couple of years, as people may hold on to their devices for longer. This delayed feedback loop could cause Apple's stock some serious trouble if it turns out to be true.
Earnings also took a hit, thanks to rising operating costs, which were up 12% in Q1. With earnings per share (EPS) falling 10% in Q1, Apple's stock is beginning to look overvalued.
AAPL PE Ratio data by YCharts
Apple's price-to-earnings multiple (P/E) has expanded significantly over the past decade, and its expensive 28 times earnings valuation is well above its pre-COVID highs. With falling revenue and rising expenses, Apple's stock looks quite expensive and, quite frankly, overvalued.
If Berkshire sold some stock here, it could raise more cash at a premium valuation and purchase better values in the market. While I still think Apple has a significant role in the economy, its days of strong growth are likely over, and the stock hasn't come to that reality.
Portfolio concentration can work out fantastically if you're right (as Berkshire has been about Apple since it opened its position in 2016).However, if you're wrong, it can severely hurt an investment portfolio through substantial losses. In my opinion, Apple is too large of a position in Berkshire's portfolio, and there are better stocks out there that Buffett could be deploying his resources toward.
